A 9 to 5 job is not something that appeals to everyone. Some people like a bit of flexibility so that they can pursue other interest or have more time for their loved ones or simply to avoid a tedious routine. So, people freelance from the comfort of their couch at home or from a cool café or a coworking space. Whatever the reason is, freelancers too are liable to pay taxes for any income they earn, just like salaried or business people, as per our Income Tax laws. In this article, we will discuss about their taxability in detail.
    1. Freelancing income
    2. Expenses allowed as a deduction
    3. Books of accounts for freelancers
    4. How to choose an accounting method
    5. Total taxable income and tax payable
    6. Applicability of GST to freelancers

1. Freelancing income

Freelancing income is when you get hired for specific assignments for a specific term, and get paid for the work upon completion and submission. You are not the company employee or on their payroll. You will not get perks (like PF) mandated by the Company Act. You are not required to come to the office – in fact, you can complete the work at leisure (by pre-agreed deadline) from any place convenient for you. Any income that you earn by displaying your intellectual or manual skills is income from a profession according to income tax laws in India. Such income will be taxable as “Profits and Gains from Business or Profession”. Your gross income will be the aggregate of all receipts you get in the course of carrying out your profession. Your bank account statement is a document you can rely on to cull out this information provided you have received all your professional income through banking channels.

2. Expenses allowed as a deduction

Freelancers can deduct expenses they incurred to do the job from their income. This could be anything from office furniture to cab fares to visit clients. These expenses must be directly related to the job you are doing. Conditions to claim expenses as a deduction from freelancing income
  • The expense is for the freelancing work being carried on
  • It has been spent fully and exclusively for the purpose of your work
  • It is incurred during the tax year
  • It is not a capital expenditure or a personal expenditure of the freelancer
  • It is not incurred for any purpose which is an offence or is prohibited by law
Expenses that can be claimed as a deduction against income
    • Rent of the property
If you take a property on rent for carrying on your work, rent paid by you can be deducted.
    • Repairs undertaken
If you have agreed to pay for repairs to the rented property, then these repair costs can be deducted. If you own the business property and carry out repairs, those are also allowed to be deducted. Any repairs to your laptop, printer, equipment are also allowed to be deducted.
    • Depreciation
When you purchase a capital asset, the benefit of such an asset is usually expected to last more than a year. Such assets are capitalized and not charged to expenses when they are bought. Every year a small portion of its cost is expensed, and is allowed to be reduced from your income. This expense, charged every year, is called depreciation. For instance, when you buy a laptop for Rs 60,000 to do your freelance work – the Rs 60,000 will be considered your asset. Assuming a straight line depreciation of 33.33% each year, Rs 20,000 shall be charged as expenses yearly. And in 3 years we would consider the asset to be fully depreciated. Note that, the type of assets, methods of depreciation and rates of depreciation to be charged as per the Income Tax Act are laid down by the Act itself and those shall be applied.
    • Office expenses
Expenses incurred to carry out your work such as purchasing a printer, office supplies, your monthly telephone bills, internet bills or conveyance expenses.
    • Travel Expenses
The cost of travel to meet your clients within or outside of India is allowed as a deduction.
  • Meal, entertainment or hospitality expenses
It can be claimed when you conduct client meetings or take your clients out for dinner or some other outing, and money has been solely spent with the intention of getting new business or retaining existing business.
  • Local taxes and insurance for your own business property
  • Domain registration, apps purchased to test your product are also allowed as expenses.
How to claim expenses common to both personal and professional purposes When assets claimed or expenses incurred are used for both professional and personal purposes, only a reasonable amount of the expenses and depreciation is allowed as a deduction, not the full amount.

For example: your mobile phone is used for both business and personal calls, only a reasonable portion of your mobile bill attributable to your freelance work will be allowed to be deducted.

Expenses that are explicitly disallowed to be deducted from your income

Case Study: Rohit, a freelance photographer, takes premises owned by his married sister for carrying out his freelancing work. Rent is an expense, which is allowed to be deducted from the freelancing income of Rohit. Since the premises is owned by Rohit’s sister he decides to divert some of his income to his sister by paying her higher than a reasonable market rent. Such excess payment will not be allowed as a deduction.

Will this come under the scanner of the I-T Department when he files his income tax return?

The following expenses are explicitly disallowed to be deducted from one’s income as per the Income Tax Act:
  • Income Tax paid by you
  • Any interest or penalty or fine for non-payment or late payment of income tax
  • Payment made to relatives shall not be allowed to be deducted when:
    • You have received goods, facility or services
    • Payment has been made to a relative( spouse, or any lineal ascendant or descendant of you or your spouse) or to a person who has substantial interest (20% or more in equity or in profits) in your business
    • The payment is not in line with – either (a) the fair market value of the goods/facility/service (b) it’s not a legitimate need of your profession (c) when you incur that expense you actually end up deriving a benefit.
  • If you pay for an expense which is more than Rs. 10,000 in cash, such expense will not be allowed to be deducted.
  Will this come under the scanner of the I-T Department when he files his income tax return   Case Study: Rohit, a freelance photographer, takes premises which is owned by his married sister for carrying out his freelancing work. Rent is an expense which is allowed to be deducted from the freelancing income of Rohit. Since the premises is owned by Rohit’s sister he decides to divert some of his income to his sister by paying her higher than a reasonable market rent.

Will this come under the scanner of the IT Department when he files his income tax return?

Rohit claimed the rent payment as a business expense and reduced his overall income. His sister, who has no other income, paid only a 10% tax on the rental income. The Assessing Officer may not allow a rent payment, which is not in line with fair market value of the premises and where the recipient is a relative.
Get help on your income taxes and tax filing from us. Tax Experts can prepare your tax returns and e-file within 48 hours. Plans start at Rs.3,700 for freelancers and consultants. Check out our Expert Assisted Plans →

3. Books of accounts for freelancers

How should freelancers account for their income — when it is due or when it is actually received? Here are the two types of accounting methods that can help you to determine this.
  • Accrual Basis of Accounting (also called Mercantile Basis)
  • Cash Basis of Accounting
Accrual Basis of Accounting Cash Basis of Accounting
Income is accounted or booked when the right to receive arises Income is booked when it is actually received
Expenses are accounted or booked when the obligation to pay arises Expenses are booked when they are actually paid
Tax liability arises when income is booked – tax may become payable when income may not have been received Tax liability arises in the year income is received – so it makes you pay tax only when income is in your hands.
Approach can be followed for all heads of Income, compulsorily for Heads of Income of Salaries, House Property and Capital Gains. Only allowed for Profits and Gains from Business and Profession and Income from Other Sources.
Example 1: You raise an invoice on your client on 2-Feb but receive the payment on 4-Apr, revenue would be booked in your accounts based on when the invoice is raised to the client. Example 1: In this same example, revenue would be accounted for only on 4th April (which will be the tax year next to the year in which invoice was raised or work got completed) when payment is received.
Example2:Your mobile bill dated 15th February to 15th March has been received. This bill will be captured as an expense in the month of March for accounting purposes – though you may or may not pay this until 31st March (you may actually pay in the next tax year). Note that on an estimated basis your mobile cost for remaining 15 days of March may also be accrued using a reasonable basis when your books of accounts are closed on 31st March for tax purposes. Example2: Your mobile bill dated 15th February to 15th March has been received and this bill will be booked as an expense in the month of March when you pay it before the 31st March (therefore gets booked in the same tax year). If you decide to pay it in April it will get booked as an expense in the next tax year (though the expense or mobile usage pertains to the previous tax year).
Note that the accounting method you choose will have to be followed for all clients, all revenues as well all expenses.

4. How to choose an accounting method

It may appear that by using cash basis of accounting your tax liability will be reduced. However, the reality is – it may only postpone your tax outgo, you will not be able to achieve a tax reduction as such. Once you choose a method of accounting you are expected to regularly comply with that method. You are not allowed to change the method of accounting often – if your intention is to save taxes or avoid taxes. Usually, it seems more logical to follow the Accrual Basis – unless your receipts are irregular, uncertain or unpredictable. The Income Tax Act has specified that the books of accounts must be maintained for the purpose of Income Tax. These have been prescribed under section 44AA and Rule 6F.

5. Total taxable income and tax payable

One can reduce their tax outgo by making full use of deductions under Section 80. In that, Section 80C of the Income Tax Act offers tax relief on certain expenses and encourages taxpayers to save for the future (by giving deductions on investments in financial products).

Net Taxable Income = Gross Taxable Income – Deductions

You can reduce your taxable income by up to Rs. 1.5 lakhs by claiming deduction for the amount actually invested/spent under this section. If you are less than 60 years of age and your Net Taxable Income is more than Rs. 2.5 lakhs, you are liable to pay tax on your income. Here is how tax will be calculated on your income:Click here to read more.

a. Tax payable for a freelancer

If the total tax liability during a financial year exceeds Rs.10,000, the taxpayer is required to pay taxes every quarter. This is called advance tax.

b. How to calculate advance tax?

  • Add up all your receipts and determine your total income.
  • Subtract expenses directly related to your work.
  • Add income from other sources, say a house property or savings account.
  • Find out the tax slab you belong to and calculate your tax due.
  • Remember to deduct TDS
  • If the tax due exceeds Rs.10,000, you are required to pay advance tax by the following due dates.

c. Due date for Advance Tax

On or before 15th June Not less than 15% of advance tax
On or before 15th September Not less than 45% of advance tax as reduced by the tax paid in the last installment.
On or before 15th December Not less than 75% of advance tax as reduced by the tax paid till the last installments.
On or before 15th March The whole amount (100%) of advance tax as reduced by the tax paid till the last installments.
Which ITR to file? Need help from an expert to calculate and pay your advance tax? Reach out to us support@cleartax.in Freelancers must file income tax returns on ITR-4.
Want to know more about the ITR-4 Form? Why not read our comprehensive guide to the ITR-4 Form?

Read our ITR-4 Guide →

Get answers to all your questions about how to fill the ITR-4 Form.

d. How to pay advance tax?

There are two ways to do it. You can pay online through the IT Department’s website. Go here to see a screenshot guide to filing tax dues on the government website. You can also fill out a paper challan and deposit tax by physically visiting your bank.

e. Penalties for non-payment of advance tax

Interest under Section 234B and Section 234C is applicable when you don’t pay your advance tax. To avoid Interest Penalty under Section 234B and 234C –
  • Pay advance tax when your tax liability in a year is Rs. 10,000 or more
  • Advance tax payments done until 31st March of the year should be 100%  of your total tax payable.
Section 234B applies when Advance Tax has not been paid and since Advance Tax is payable as per dates set out by the IT Department, 234C is applicable when interest is not paid according to these due dates. You can read in detail about 234B and 234C Case Study: Aditi had a runaway hit with her task manager app on the Google Play and iOS App Store in 2014. Click here to read more about tax calculation and filing for mobile developers. →

6. Applicability of GST to freelancers

Earlier VAT & Service Tax applied on freelancers. Now these taxes have been replaced by GST.

a. If you sell goods

GST has replaced the earlier VAT applicable. The rate of GST will depend on the items you are selling. For example, if you make and sell cakes to bakeries then you must charge 18% GST. Currently, this is the applicable GST rate on cakes.

b. If you provide service

18% GST applies on most services. So, for your freelancing services you must charge 18% GST from clients. Refer our handy  GST Rate finder to check find out the latest rates.

Example

Let’s say your total billing to your client is Rs 75,000. GST rate is 18%, i.e.,Rs. 13,500 (75,000*18%). You must invoice your client Rs 88,500 and Rs. 13,500 will be GST collected from the client. This amount has to be deposited with the government. [Earlier Swaccha Bharat cess and Krishi Kalyan cess are no longer applicable under GST]

c. Things to remember under GST

  • If the total revenue from freelancing work is not more than Rs. 20 lakhs, then GST does not apply. (Click here to find out who has to register mandatorily under GST)
  • You are eligible for composition scheme, if you are selling goods.
  • Composition scheme does not apply on services. However, you can provide inter-state services upto Rs. 20 lakhs without registering under GST.
  • GST does not apply on exports
  • Your invoices must be GST compliant. Sign up for free to start  GST complaint billing and file GST Returns seamlessly using ClearTax GST software.
Refer our article on the impact of GST on freelancers for more information.

i. How to understand whether I need to apply for GST?

You must register under GST if your aggregate turnover in a year is more than  Rs 20 lakhs (Rs 10 lakhs for North Eastern and hill states).

ii. How to calculate my aggregate turnover in a year?

Refer our article on how to calculate aggregate turnover to check if you have to register for GST.

iii. How to make GST payments?

GST payments can be done online. Doing these payments online is mandatory if your payments exceed Rs. 10,000. GST has to be deposited with the government either quarterly or monthly based on whether you have opted for composition scheme and your turnover.

Interest will be payable for any delays in depositing service tax with the government.

Refer our article to find out more on GST payments.

How to file GST returns?

GST Returns have to be filed quarterly or monthly based on whether you have opted for composition scheme and your turnover. Composition dealers and those with annual sales below Rs. 1.5 crore can file quarterly returns.

Once you obtain a GST Identification number, return filing is compulsory for you.

Refer our article to find out more on GST returns.

Be GST ready with ClearTax

ClearTax GST Software is a fast easy way to be GST ready. Our user-friendly software will help you to file correct GST returns on time. It also comes with customer support and numerous guides and videos to help you. Download a free trial today!

Do you have a question about GST?

Refer to our articles on GST registration to find out how to register and the benefits of registering. If you have any questions related to GST applicability to your income or need to get yourself registered, let us know at support@cleartax.in

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