What is ‘freelancing’ as per income tax rules?

Any revenue a person makes using their intellectual or manual abilities comes under freelancing as per income tax rules. The income from freelancing can be put under the “profits and gains from business and profession” category. 

What is freelancing income?

Freelance income includes earnings that you generate from completing freelancing tasks. Freelancing is a form of self-employment as you are not hired by the company or placed on its payroll.

You won’t receive any benefits (like PF) that the Company Act requires since you are not an employee of any company you work with. So, you work as a third-party contractor which also means the company, or your client, don’t always get to govern your working hours or the place of work. For example a freelance content writer could complete their freelance writing task at a cafe or at home. 

The total of all the Gross receipts you receive from freelancing is your gross income. You can rely on your bank account statement to extract information about receipts. 

What are the expenses a freelancer can claim deductions against?

So what are considered expenses for freelancers? Anything from work travel to internet bills and office infrastructure costs would be counted as expenses. 

But it’s possible to claim deductions against some of these expenses, including:

Travel expenses

These are expenses for travel undertaken for work within or outside of India. You can also claim a deduction for transportation costs to get to the office or co-working space.

Property rent

Rent for any property you may have used to complete the work. (This also includes any maintenance costs you incurred on the property).

Repairs done

Any repairs made to any electronic equipment you used to complete the work such as a laptop that you own.

Office expenses

These are costs that you incur for work-related purposes that you can claim for deduction. These include office expenses such as supply purchases, laptop, internet fees, and phone bills.  

Depreciation

When you buy a capital asset you expect the benefit of that investment to last longer than a year. You capitalize on the asset instead of charging it as expense. You can then deduct a small percentage of the price of the asset from your income each year as an expense. 

Freelancers can claim a deduction from the depreciation value of work equipment like laptop or PC. It can be a piece of equipment such as a laptop or a personal computer. 

Hospitality, meal or entertainment expenses

If you hold client meetings, treat your clients to dinner, or go on other outings, you can claim deductions for them.  

Business apps and registering a domain

If you host a website or use software apps to streamline your work, you can claim a deduction against both.

Other expenses

You can deduct any expenses related to insurance and make payments for local taxes. 

How to claim expenses as a freelancer?

The Income Tax Act only accepts a reasonable part of business expenses as a deduction and not the entire amount.

Disallowed expenses

The Income Tax Act disallows you to deduct the following expenses from your income:

• Any income tax you paid
• Cash payments for expenses more than INR 10,000 
• Any interest, fine, or penalty for failing to pay taxes on time
• Payments made to family members. You are not allowed to deduct these payments in specific circumstances. For example, when a family member (or a spouse) receives payment. It can also be for someone who owns a significant percentage (20% or more) of your business profits.

How much tax is applied to freelancers in India?

The average freelancer’s income in India can vary a lot depending on their expertise and industry. This can in turn affect the amount of tax applied to a freelancer. The amount of income you earn plays a key role when calculating taxable income.

Freelancers can calculate income tax on a presumptive basis if they receive less than 50 lakhs in Gross Receipts. In this case, the tax amount becomes equal to 50% of the total Gross Receipt. 

If Gross Receipts exceed 50 lakhs, a freelancer may maintain a book of accounts. 

In case, the net profit is less than half of their Gross Receipts, the difference between Gross Receipts and business expenses will represent the taxable amount.

The exact tax percentage will depend on the tax slab your taxable income falls in. 

For instance, if you made 20 lakhs in a year, then your taxable income will be 10 lakhs (50% of the total Gross receipt). Therefore you will have to pay 15% tax on your taxable income, which is 10 lakhs. 

What are the different tax deductions that Indian freelancers can use?

Some of the exemptions and deductions that freelancers can use include:

• Section 80 C – Offers freelancers tax deduction of up to INR1.5 lakhs on investments towards schemes like ELSS, ULIP, FDs and payments such as tuition fees.

• Section 80 CCC – Tax deduction is available against pension plans with a limit of INR 1.5 lakhs 

• Section 80 CCD – Deductions on investments in the Central Government Pension Schemes

• Section 80 CCF – Exemption for investment towards long-term infrastructure bonds of up to Rs 20000

• Section 80 CCG – Exemption of up to INR 25,000 on investment in government Equity Savings Scheme

• Section 80 D – Deductions on the expenses for payment of premiums for health insurance

• Section 80 DD – Exemption on treatment for normal or severe disabilities which can be up to INR 1.25 lakhs

• Section 80 G – 100% deduction on donations to charitable trusts and relief funds. 

• Section 80 E – Tax deduction is available towards education loans

• Section 80 EE – Provides tax benefits against payment made towards a residential loan–available for upto INR 50,000

What is the taxable income for a freelancer?

Taxable income is the sum of all income on which income tax is charged. It varies depending on an individual’s earnings. Tax brackets are applied according to the total taxable income.  

How to calculate taxable income for freelancers? 

There are two ways to calculate taxable income for freelancers

Presumptive Tax Calculation

If your Gross Receipts are less than INR 50 lakhs, you can use a presumptive basis under Section 44ADA to calculate the taxable income. For freelancers, the presumptive assumption rate is 50%. 

 

Taxable Income = 50% of Gross Receipts

It is not necessary to keep books of accounts or have them audited by a CA if you are under this section. 

Net Taxable Income from Profit & Loss Account 

This method is more preferable if the net profit is less than half of the annual Gross Receipts.  

 

Net Taxable Income = Gross Taxable Income – Deductions

Filing ITR for freelancers 

Knowing the right way of filing ITR is a major process to understand if you are learning how to work as a freelancer in India. 

Even if a salaried person has earned extra income from freelancing outside of their job, they still need to pay taxes over their total income.

Freelancers earning in India can only choose between ITR-3 or ITR-4. 

How to file ITR as a freelancer?

The process of filing an income tax return for freelancers might seem a bit complex, but it becomes easier as you break the whole thing down. Here’s the step by step process to go about it.

1- Calculate the gross income for the financial year from 1st April to 31st March. (This would be the total payments received from clients). You can also just download yearly account statement as an Excel file to make the calculations easier.

2- Mark your freelance business expenses to request a tax deduction

3- Select the appropriate form which can either be:

Form ITR-3 

This is for freelancers who get business profits. This can include income from capital gains, house property or salary/pension. 

Form ITR-4 

This form is for those who select a presumptive income scheme under IT Act Sections 44AD and 44AE. It is applicable if freelancers work in a profession under Section 44ADA. It also applies if they have a business income as outlined in Section 44AD or 44AE. 

The Income Tax Return ITR Form -4 is meant for small business owners that don’t maintain any books, but do maintain a sales ledger. Freelancers like online content writers in India, bloggers, and vloggers have to file the ITR 4 form. 

People who are salaried and earning additional income from freelancing activities also need to fill the ITR-4 form. 

The forms are downloadable from the Income Tax Department’s official website. Freelancers can fill out the forms offline and upload the file in XML format in the same website portal. As an alternative, you can complete the forms online and submit them. A digital verification would follow after.

Tax rates and annual income slabs for filing ITR

The income tax taxation slabs apply to both salaried employees and freelancer payments. Income up to INR 2.5 lakhs is not taxed. Income between 2.5 lakhs and 5 lakhs has a 10% tax rate, 5 to 10 lakhs have 20%, and income above 10 lakhs has 30%. This is for the old tax regime. 

The following shows tax rates that apply for freelancers on the new tax regime:

How to pay advance tax?

Advance tax for freelancers requires them to pay taxes every quarter. This reduces bulk instead of paying once in a given financial year.

According to the Income Tax Act, sections 234 B, and 234 C, you must pay interest if you fail to pay advance tax. You can follow these steps when calculating your advance tax: 

1. Combine all the receipts and calculate your annual earnings
2. Deduct all the expenses and TDS 
3. Add earnings from other sources like rental property income, interest income, capital gains etc.  
4. Check the total income according to the tax slab to which they belong. This will determine the amount of tax to pay 

Freelance taxes also have a due date. It is also important to note that the due date for paying advance tax varies. Pay 30% of the total tax payable before 15th September. 60% before 15th December and 100% by 15th March. 

After calculating the advance tax amount you can pay by following these steps:

1. Go to the Tax Information Network of the Income Tax Department
2. Look for the Challan 280 option
3. Select (0021) income tax other than companies to fill in your personal details. Proceed to choose the type of tax payment and the correct assessment year. Provide your contact information, PAN number address and mode of payment. 
4. Verify the details and make the payment
5. Collect the tax receipt and keep it to use while filing your income tax return 

Filling for GST for freelancers in India

GST refers to the tax imposed on your products and services. Freelancing falls under the of services. 

If the total annual revenue of a freelancer exceeds INR 20 lakhs they will need to register under the GST. The limit is INR 10 lakhs for North Eastern states. 

The current GST rate is 18% for freelance content writing services. 

Depending on where you work and where your clients are located, you will be required to pay CGST and SGST. The GST rate may also change based on the goods and services that the freelancer provides.

No GST for freelancers exemption is available. This is regardless of whether the business operates online or has a physical store. 

Freelancers can claim input tax credits on their business expenses. Other things for freelancers to remember under GST are:

• GST does not apply if the total income from freelancing jobs does not exceed INR 20 lakhs.
• Zero-rated supplies, such as exports, are exempt from the GST. That means if you have foreign clients, you don’t have to charge GST on their invoices. But, if your total income exceeds INR 20 lakhs per year, you will still have to register for a GSTN. If you only have foreign clients, you will be filing zero GST. But if you have Indian clients as well, then you will charge 18% of their invoices. 
• Your invoices that charge GST should have your GSTN present. 

Should Freelancers file TDS Returns?

Tax Deducted at Source (TDS) occurs when you receive payments as a freelancer in India from registered companies.

TDS for a freelancer is deducted at a rate of 10% on all payments made by companies to a freelancer professional, but this deduction is only applicable when the total payment made to the freelancer in one financial year is more than INR. 30,000 (total). For example, if a freelancer receives an invoice of INR 60,000, the company deducts 10% of it as TDS. You will get INR 54,000 as payment. The rest of the TDS amount is exempted from taxable income and you will get this amount (INR 6,000) refunded back to you when you file for taxes. 

This is why it is called tax deducted at source and is done to encourage more individuals to file taxes.

The TDS amount is your own money that you can reclaim later as a freelancer. The amount is usually refunded after 2-3 months of filing income tax. 

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A freelancer must review the applicability of TDS on all payments. You can check the applicability under TDS provisions which highlight all the payments. Its best to ask the clients if they will be making TDS deductions. 

The total amount of TDS that has been dedicated is available in form 26As on Income Tax Portal. You can use the form to determine all TDS deductions since it connects to your PAN number.  

Final words

Do freelancers need to pay taxes in India? Absolutely. 

If you are making money by offering freelance services, you need to file income tax in India.

Acquiring the right tax information is part of knowing how to freelance in India. Freelancers need to remember the expenses that they can claim tax deductions against. 

Remember that tax liability depends on how much freelancers get paid. Any amount more than INR 10,000 for a financial year will make a freelancer eligible to pay taxes.

If you are still struggling with your taxes and reaching the tax deadline, its best to consult a CA to get some help.