Income Tax for Freelancers
A 9-to-5 job is not something that appeals to everyone. Some people like a bit of flexibility to pursue other interests/passions have more time for their loved ones, or simply avoid a tedious routine. That is why in today’s world many people prefer freelance work as it provides flexibility to work from their couch at home, a cool café, or a coworking space. As per the income tax laws, freelancers too are liable to pay taxes for the income they earn, just like other salaried or business taxpayers.
Freelancing Income
Freelancing income comes into the picture when you get hired to work on specific assignments for a particular term and get paid for the work upon completion and submission. In freelancing, you don’t have a guarantee of work for a period but you get flexibility with the work and time. You will not be an employee of the company or placed on their payroll. You will not get perks (like PF) mandated by the laws. But you will also not be required to go to the office – in fact, you can complete the work at leisure (by the pre-agreed deadline) from any place and time convenient to you.
Any income 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 while carrying out your profession. Your bank account statement is a document you can rely on to cull out this information, provided that you have received all your professional income through banking channels.
Expenses Allowed as a Deduction
Freelancers can deduct expenses incurred in relation to their professional work from their income. These expenses could be anything from office furniture to cab fares to visit clients. They must be directly related to the professional work performed to earn the income from freelancing.
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
- He is not opting for the presumptive scheme of taxation
Expenses that can be Claimed as a Deduction Against Income
- Rent of the property
If you have rented a property to carry out your work, the rent can be claimed as a deduction. - 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 and other equipment which are used for your work 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. The purchase cost of such assets is 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, 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. After 3 years, we would consider the asset fully depreciated. Note that the type of assets, methods of depreciation, and rates of depreciation to be charged are laid down by the Income Tax 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, and conveyance expenses can be claimed as a deduction. - 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, take your clients out for dinner, or some other outings 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 and apps purchased to test your product are also allowed as expenses.
How to Claim Expenses Common to Both Personal and Professional Purposes?
When assets bought or expenses incurred are used for both professional and personal purposes, only the proportionate amount of expenses incurred towards earning professional income will be allowed as a deduction from income derived from business and profession.
For example:
Your mobile phone is used for both business and personal calls. Therefore, only a reasonable portion of your mobile bill attributable to your freelance work will be allowed as a deduction from your income.
Expenses that are Explicitly Disallowed to be Deducted from your Income
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, penalty or fine for non-payment or late payment of income tax
- 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 a substantial interest (20% or more in equity or in profits) in your business and the payment is not in line with the fair market value of the goods/facility/service (Section 40A(2))
- If you pay for an expense which is more than Rs.10,000 in cash, such expenses will not be allowed for deduction. (Section 40A(3))
Case Study 1:
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 are owned by Rohit’s sister he decides to divert some of his income to his sister by paying her higher than reasonable market rent. Such excess payment will not be allowed as a deduction.
Will this come under the scanner of the IT Department when he files his income tax return?
Let’s assume Rohit claims the whole amount of rent payment as a business expense and reduced the same from his overall income. His sister, who has no other income, paid only a 10% tax on the rental income taking the benefit of slab rates. The Assessing Officer may not allow the whole rent payment as deduction, which is not in line with the fair market value of the premises, especially when the recipient is a relative.
Case Study 2:
Rohit, a freelance photographer, takes a service of other photographer to meet the seasonal demand. He pays Rs. 25,000 for the services of other photographer, however, the payment is made in cash by Rohit. The payments made for the service of other photographer as they are made in cash.
Presumptive Taxation
You may be thinking, isn’t there any other way you can pay taxes hassle free. Yes, there is a way by which you can opt for the presumptive taxation. In presumptive taxation, you need not maintain books of accounts or get the same audited, you can provide a certain percentage of your turnover/gross receipt as a taxable income. Presumptive Basis is an alternative to normal provisions for income and tax calculation.
For Freelancing Businessmen: If you are doing a business and the turnover does not exceed Rs. 2 crores then in that case you can provide 8% of your turnover/gross receipt as your income. However in case of digital transactions you can provide 6% of your turnover as your income.
Further, the limit of Rs. 2 crores has been increased to Rs. 3 crores if the cash receipt does not exceed 5% of the total receipt.
For Freelancing Professionals: If you are doing a professional activity and the gross receipt does not exceed Rs. 50 lakhs then in that case you can provide 50% of your gross receipt as your income.
Further, the limit of Rs. 50 lakhs has been increased to Rs. 75 lakhs if the cash receipt does not exceed 5% of the total receipt.
Refer article, for more details on the presumptive taxation for freelance.
Income Tax Filing Process for Freelancers
The steps are as follows:
- Navigate to the Income Tax E-Filing Portal.
- If you are not opting for the presumptive scheme of taxation then you have to select ITR-3 for filing your income tax return. Fill all the details including basic information, gross total income, deductions, and taxable total income, business and profession income details, Profit & Loss, Balance sheet, TDS (tax deducted at source), advance tax and self-assessment tax details. Click here to learn how to file ITR-3 through ClearTax.
- If you are opting for the presumptive scheme of taxation then you have to file your returns using ITR-4. Fill all the details including basic information, gross total income, deductions, and taxable total income, business and profession income details, TDS (tax deducted at source), advance tax and self-assessment tax details.
- Form 26AS should be used to determine the TDS and TCS credit available which can be used to offset their tax liability.
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 for or booked when the right to receive arises | Income is booked when it is actually received |
Expenses are accounted for 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. |
This approach can be followed for all heads of income, compulsorily for heads such as salary, house property, and capital gains. | The approach is allowed only for profits and losses from business/profession and income from other sources. |
Example 1: You raise an invoice for a transaction with your client on 2 February but receive the payment on 4 April. The revenue will be booked in your account based on the date, the invoice was raised to the client. | Example 1: In this same example, revenue would be accounted for 4th of April (which will be the tax year next to the year in which invoice was raised or work got completed), when the payment is received. |
Example 2: 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.
This is applicable irrespective of whether you pay this by 31 March or not (you may actually pay in the next tax year). Based on estimation, the mobile bill for the remaining 15 days of March will be accrued using a reasonable basis when your books of accounts are closed on 31st March for tax purposes. | Example 2: 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). |
Important Points to Remember
- The accounting method you choose will have to be followed for all clients, all revenues as well all expenses.
- As per ICDS 1, if an Individual or HUF has to get his books of accounts audited under section 44AB, then he must follow accrual basis for the computation of total income for Income tax purposes.
How to Choose an Accounting Method?
It may appear that using the cash basis of the accounting method will reduce your tax liability. However, the reality is that it may only postpone your tax outgo. However, you will not be able to achieve any tax reduction.
Once you choose a method of accounting you are expected to regularly apply that method. You are not allowed to change the method of accounting often i.e. 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.
However, there is a limit of income/turnover prescribed below which you are not required to maintain the books of account.
Note: If you opt for presumptive scheme of taxation then you do not have to maintain books of accounts.
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 for or booked when the right to receive arises | Income is booked when it is actually received |
Expenses are accounted for 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. |
This approach can be followed for all heads of income, compulsorily for heads such as salary, house property, and capital gains. | The approach is allowed only for profits and losses from business/profession and income from other sources. |
Example 1: You raise an invoice for a transaction with your client on 2 February but receive the payment on 4 April. The revenue will be booked in your account based on the date, the invoice was raised to the client. | Example 1: In this same example, revenue would be accounted for 4th of April (which will be the tax year next to the year in which invoice was raised or work got completed), when the payment is received. |
Example 2: 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.
This is applicable irrespective of whether you pay this by 31 March or not (you may actually pay in the next tax year). Based on estimation, the mobile bill for the remaining 15 days of March will be accrued using a reasonable basis when your books of accounts are closed on 31st March for tax purposes. | Example 2: 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). |
Important Points to Remember
- The accounting method you choose will have to be followed for all clients, all revenues as well all expenses.
- As per ICDS 1, if an Individual or HUF has to get his books of accounts audited under section 44AB, then he must follow accrual basis for the computation of total income for Income tax purposes.
How to Choose an Accounting Method?
It may appear that using the cash basis of the accounting method will reduce your tax liability. However, the reality is that it may only postpone your tax outgo. However, you will not be able to achieve any tax reduction.
Once you choose a method of accounting you are expected to regularly apply that method. You are not allowed to change the method of accounting often i.e. 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.
However, there is a limit of income/turnover prescribed below which you are not required to maintain the books of account.
Note: If you opt for presumptive scheme of taxation then you do not have to maintain books of accounts.
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 under Section 80
You can reduce your taxable income by up to Rs.1.5 lakh by claiming a deduction for the amount actually invested/spent under this section. If your income is above the basic exemption limit (Rs. 2,50,000 under old regime and Rs. 3,00,000 under new regime) then you have to file your income tax return.
Here is how the tax will be calculated on your income:
Click here to read more.
Tax Payable By a Freelancer
If the total tax liability during a financial year exceeds Rs.10,000, the taxpayer is required to pay 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/TCS
- If the tax due exceeds Rs.10,000, you are required to pay advance tax by the following due dates.
Due dates for Advance Tax are as under:
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 instalment. |
On or before 15th December | Not less than 75% of advance tax as reduced by the tax paid till the last instalments. |
On or before 15th March | The whole amount (100%) of advance tax as reduced by the tax paid till the last instalments. |
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 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.
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
Applicability of GST to Freelancers
Earlier VAT & Service Tax were applied on freelancers income. Now, these taxes have been replaced by GST.
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.
If You Provide Service
18% GST applies to most services. So, for your freelancing services, you must charge 18% GST from clients. Refer to our handy GST Rate finder to check to 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.
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 the composition scheme if you are selling goods or services with a turnover below the notified threshold.
- GST does not apply to zero-rated supplies such as exports.
- Your invoices must be GST compliant. Sign up for free to start GST-compliant billing and file GST Returns seamlessly using ClearTax GST software.
Refer to our article on the impact of GST on freelancers for more information.
- 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 states). - 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. - How to make GST payments?
GST payments can be made online. It is mandatory to make payments online if your payments exceed Rs.10,000. GST has to be deposited to the government either quarterly or monthly based on your turnover and the choice of composition scheme.
Interest will be payable for any delays in depositing service tax with the government. Refer to 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 your turnover and if you have opted for the composition scheme. Composition dealers and those with annual sales below Rs.1.5 crore for the supply of goods can file quarterly returns. For service providers, the limit is Rs.50 lakhs.
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 can help you file correct GST returns on time. It also comes with customer support and numerous guides and videos to help you.
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
Should Freelancers File TDS Return?
Freelancers may get their payments after tax is deducted at source. Similarly, freelancers are required to deduct tax at source before making certain payments. Here is an illustration:
Roshni is a graphic designer who works as a freelancer for multiple clients. She is paid for each project she works on and not a fixed monthly salary. In each such payment, the client deducts tax at source before paying out. But, she does not know about the tax she has to deduct at the source.
Many freelancers have a name for the business and a current account meant for business purposes; they are treated as small businesses from a taxation perspective. At times when Roshni has tight deadlines, she hires professionals to keep up with the deadlines. In this case, she must deduct tax at source on the amounts payable to them.
Every time a freelancer or a small business owner makes a payment to professionals which exceeds Rs.30,000 per transaction or in aggregate during a financial year, TDS applies at the rate of 10%. The deducted tax at source must be deposited with the government.
Further, a freelancer must deduct tax or TDS only if he has been audited during the previous financial year. A freelancer will be audited only if the annual gross receipts exceed Rs 50 lakh. Otherwise, there is no need to deduct tax at source. Hence, where the annual gross receipts exceed Rs 50 lakh, and the freelancer has had his accounts audited in the earlier year, TDS would apply to various payments including salary, and contractual payments made by the freelancers.
The freelancer would have to check for the applicability of TDS on all payments covered under the provisions of TDS. Also, once the taxes are deducted, the freelancers are required to deposit the tax and file TDS returns.
Cleartax has made it easy for freelancers to file income tax returns as well as file TDS returns.
Related Articles
Timeline for Depositing TDS and Penalties
Expenses allowable as deduction
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