Freelancing income

App developers can deduct expenses they incurred to do the job from earnings. This could be anything from office furniture to cab fares for client visits.

Aditi had a runaway hit with her task manager app on the Google App and iOS store last year. She made about 7 lakhs rupees after 35,000 downloads from all over the world.

Let’s look at all the expenses she incurred as a freelancer. Remember these expenses must be directly related to building the app.

She bought office furniture, a desk and a chair, for Rs.9,600 to work on the app. She took a high-speed internet connection that costed her Rs.12,000.

She had a couple of meetings with consultants during the year and she took a taxi to meet them. Rs. 8,000. She hired a co-developer temporarily and paid her Rs.35,000 overall.

Registration on the Play Store and iOS costed her Rs.10,000.

Aditi can also claim depreciation on the laptop. A depreciation of 60% is allowed on laptops as per the Income Tax Act. Depreciation on Aditi’s laptop of Rs.60,000 works out to be Rs.36,000.

Aditi split her telephone bill of Rs.36,000 for the year as part business and part personal and claimed Rs.18,000 as expense directly related to app development.

She paid Rs.24,000 to the payment gateway partners as fee.
Net earnings = Earnings – Expenses related to app development

Expenses related to app development are summed up here

desk Rs 9600 + internet charges Rs.12,000
+ local travel Rs 8000 + co-developer salary expenses Rs.35,000
+ ios and playstore registration expenses Rs.10,000
+ depreciation laptop Rs 36000 +telephone expenses Rs.18,000
+ payment gateway feee Rs.24,000
= Rs.1,52,600

Net earnings = Rs.6,80,000 – Rs. 1,52,600

Net earnings from freelancing work = Rs.5,27,400

Calculating taxable income

Aditi’s freelancing income is Rs 5,27,400. But total taxable income is the sum of income from the following heads:

Income from Salaries
This includes any income of salary or other payments received by virtue of an employment. Aditi’s one month’s salary of Rs 52,000 was credited to her account and PF of Rs 1,200 and TDS of Rs 2,000 was also deducted before she quit her job at the end of April 2014.
Income from House Property
Aditi owns a one bedroom apartment and has given it on rent to 2 students who pay her Rs 15,000 in total. She also paid property tax of Rs.15,000 to the local authorities. From total rental income from the house, property tax paid is allowed to be deducted.
Income from Freelancing/Business and Profession
Income from freelancing (business or profession) as calculated is Rs 5,27,400 for Aditi.
Income from Capital Gains
Aditi did not sell any capital asset in FY 2014-15.
Income from Other Sources
Income from interest on savings account, interest from fixed deposits – this is the residual head of income, incomes which cannot be taxed under any other head of income are taxed here. Aditi has a fixed deposit on which she earned an interest of Rs 12,000. She earned an additional interest of Rs 7,800 on her savings account.
Particulars Amount Amount
Income from Salary 52,000
Income from business and profession 5,27,400
Income from house property
Rs.15,000*12
1,80,000
Less: Taxes Paid 15,000
Net Annual Value 1,65,000
Less: Standard deduction 30% 49,500
1,15,500
Income from other sources
Savings bank interest 7,800
Fixed deposit interest 12,000
19,800
Total taxable income 7,14,700

Total Taxable Income of Aditi is Rs.7,14,700.

Calculating tax payable

A PF of Rs.1,200 was deducted by Aditi’s previous employer. A TDS of Rs.2,000 was also deducted.

A TDS of Rs.1,200 was deducted by the bank on her fixed deposits. Aditi purchased a life insurance policy for Rs.50,000. She also has a PPF account in which she contributed Rs.60,000 for this year.

Aditi also took out a health insurance policy and paid a premium of Rs 12,000. She also invested in an ELSS fund for Rs.25,000 on recommendation from her friend.

This is how Aditi’s tax will be calculated for the year:

Investments eligible for deduction under section 80C

  1. Life insurance policy premium of Rs 50,000
  2. Investment in PPF of Rs. 60,000
  3. Purchase of ELSS fund of Rs. 25,000
  4. PF of Rs 1,200

Total: Rs.1,36,200

Other deductions

For purchase of a health insurance policy a maximum deduction of Rs 15,000 can be claimed under section 80D. Therefore, Aditi can claim the entire premium of Rs 12,000.

Aditi can also claim deduction under section 80TTA for interest on savings bank account of Rs 7,800. Maximum deduction available under this section is Rs 10,000 or interest earned.

TDS deducted Rs 2,000 by previous employer and Rs 1,200 by Bank on Fixed Deposit Interest.

Particulars Amount Amount
Total Taxable Income 7,14,700
Less: Deductions under Section 80C
PF deducted by employer 1,200
LIC 50,000
ELSS 25,000
PPF 60,000
1,36,200
Less: Deductions under Section 80D 12,000
Less: Deduction under Section 80TTA 7,800
Income less deductions 5,58,700
Tax on total income
up to Rs.2,50,000 Nil
Rs.2,50,000 to Rs.5,00,000 25,000
Rs.5,58,000 to Rs.5,00,000 11,600
Total Tax 36,600
Cess 1,098
Total tax including cess 37,698
Less: TDS 3,200
Net tax payable 34,498

Total tax payable by Aditi is Rs 34,498. Do note that Aditi has not paid any advance tax and since her tax liability exceeds Rs. 10,000 in one year – Aditi should have paid advance tax. Since no advance tax has been paid by her interest shall be charged under section 234B and 234C.

Other taxes applicable to Aditi

Service Tax: If the total revenue from freelancing work is Rs.10,00,000 or less, Service Tax rules do not apply. However, once you cross Rs.9,00,000 in revenue it is mandatory to apply for service tax registration.

Service tax is not applicable when services are exported.

Therefore, at this stage service tax is not applicable to Aditi.

VAT: VAT is not applicable in this case since there are no physical goods being sold.

TDS: The Indian Payment Gateway charged Aditi Rs. 24,000 as commission fees in the month of March. Aditi has made a payment of Rs. 24,000 to the Payment Gateway for its services. According to law, Aditi has to deduct TDS on this payment.

Read more about income tax for freelancers

Go to Freelancers Guide

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