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Freelancing income

As per the Income Tax Act, an income from any profession that involves work, which requires you to use a skill, which is an intellectual skill or is a manual skill, then such income will be taxable under the head ‘Profits and Gains of Business and Profession’.

Your income is the sum of all your receipts from carrying on this work for your clients. Your clients may be based in India or outside of India and they make the payments towards the work you do for them. You can use your bank account statements to add up all the receipts that have been credited to your account by clients as payment towards work done.

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.

What are the conditions to meet regarding your expenses?

  • 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

 

What are the 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 is allowed to 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 which is charged every year is called depreciation.

For example, when you buy a laptop for Rs 60,000 to carry on your freelancing work – the Rs 60,000 will be considered your asset and assuming a straight line depreciation of 33.33% each year (depreciation % and methods are laid out in the Act for different type of assets, hypothetical rate here for ease of understanding), every year Rs 20,000 shall be charged as expenses. 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 on your work such as 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

When you do client meetings, when you 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 can expenses common to both personal and professional purposes be claimed?

When expenses are incurred or asset on which is being claimed is 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.

Are some expenses explicitly disallowed to be deducted from your income?

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 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 do that expense you actually end up deriving a benefit.
  • If you pay for an expense which is more than Rs.20,000 in cash, such expense will not be allowed to be deducted.

All payments in excess of Rs.20,000 must be made either by an account payee cheque or a demand draft.

Keep a record of all your expenses and store all your expense receipts.

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 I-T 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.

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Books of accounts for freelancers

How should freelancers account for their income — when it is due or when it is actually received?

There are two types of accounting methods –

  • 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.
For e.g., you raise an invoice on your client on 2-Feb but receive the payment on 4-Apr, revenue would be booked in your accounts basis when invoice is raised to the client and the fact that milestones are completed as required. 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.
For Example – 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. For Example – 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.

Which accounting method should freelancers prefer?

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 very irregular or are very uncertain.

The Income Tax Act has specified the books of accounts that are required to be maintained for the purpose of Income Tax. These have been prescribed under section 44AA and Rule 6F.

Total taxable income and tax payable

Net Taxable Income = Gross Taxable Income – Deductions

One can reduce their tax outgo by making full use of deductions under Section 80. 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).

You can reduce your taxable income by up to Rs.1,50,000 by claiming deduction for the amount actually invested/spent under this section.

Click here to read more.

If you are less than 60 years of age and your Net Taxable Income is more than Rs. 2,50,000, you are liable to pay tax on your income. Here is how tax will be calculated on your income:

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.

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.

Due date for Advance Tax

On or before 15th JuneNot less than 15% of advance tax
On or before 15th SeptemberNot less than 45% of advance tax as reduced by the tax paid in the last installment.
On or before 15th DecemberNot less than 75% of advance tax as reduced by the tax paid till the last installments.
On or before 15th MarchThe 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.

How to pay advance tax?

There are two ways to do it. You can pay online through the I-T 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.

What are the 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 uptil 31st March of the year should be 100% or more 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 here.
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. →

Other applicable taxes

Value Added Tax

VAT is only applicable when there are physical goods being sold.

Service Tax

When you earn an Income from a ‘Service’, service tax is usually required to be paid by you — the provider of the service (you) have to recover this tax from the receiver of such services Add it to the total value of your service and the client has to make the payment inclusive of this tax.

Service tax rate upto 31st May 2015 is 12.36%. Let’s say your total billing to your client is Rs 75,000. Service tax on it shall be Rs 9270. You invoice your client Rs 84,270 and Rs 9,270 will be service tax collected from the client and which has to be deposited to the government.

Service Tax rate for financial year 2015-16 is 14% effective 1st June 2015.

Swacch Bharat cess has been levied @ 0.5% from 15.11.2015 which increased service tax from 14% to 14.5%.

Krishi Kalyan cess has been levied from 01.06.2016 @0.5% which made the rate of service tax 15%.

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 do not apply when services are exported.

Do you have a question about applicability of service tax?

If you have any questions related to service tax applicability to your income or need to get yourself registered, let us know at support@cleartax.in

Does service tax apply to me?

  • When revenue is Rs. 10 lakhs or less: If the total Revenue you earn from freelancing work is Rs 10lakhs or less, Service Tax rules do not apply. You will be exempt from collecting and paying service tax on your services. Here Revenue means your total receipts from your clients. Note that Revenue has a different meaning from Income, Income would be your revenue net of expenses.
  • Export of Services: Service Tax is not applicable on services which are exported. Whether a particular service falls under the definition of ‘export of services’ will depend upon what is considered as the place of provision of services – simply, are these services considered as provided outside India or are these services considered as provided in India. There are tax rules that define when services are considered as provided in India or outside India. When this is an export of services and certain conditions are met – service tax may not be applicable. Unsure whether your service considered as an export – reach out to us and we shall help you!

How to make service tax payments?

Service tax payments can be done online. Doing these payments online is mandatory if your payments exceed Rs. 11 lakh in a year. Service tax has to be deposited with the government either quarterly or monthly based on whether you are an individual/company/partnership. Interest may also become payable for any delays in depositing service tax with the government.

Service Tax Returns have to be filed twice a year in Form ST-3 or ST-3A as applicable. Once you obtain a Service Tax Registration number, return filing is compulsory for you.

ClearTax can help you file your service tax return. Write to us at support@cleartax.in

How is revenue estimated for testing Service Tax applicability?

Add Gross Value of Invoices
Service tax is chargeable on gross receivable of your freelancing work. You can exclude values which are considered as exports since service tax is exempt on export of services. Aggregate the total invoices raised to your clients. These could be totals of invoices raised by you or amounts agreed to be paid to you. In case your freelancing services are not backed by an invoice or an agreement, you may find amounts credited to your bank account. These invoices should be gross values, and not net of any expenses.

Important to note that the invoices are aggregated whether or not payment has been received against these invoices.

Add up values from all services
The nature of freelancing work or services provided by you may be different, you may be coding for one client or providing technical advice to another client or testing software for others. However the aggregate value of all such services have to be considered (and not for each type of service).

Other Incomes
Only your receipts or value of services from freelancing work is considered for this purpose.

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