Are you a Freelancer? You must know about taxation on freelancing income

Amid COVID-19, a new trend of job/work has evolved in which there are people who have a wish to move out of the 9 to 5 job. In fact, a 9 to 5 job doesn't suit all. People are choosing to work as freelancers because it has allowed them to pursue other interests, give more time to their loved ones, or simply escape a tiring routine. However, being a freelancer does not mean that you can avoid taxation.

Income tax laws clearly mention that like other salaried or professional taxpayers, freelancers are also accountable to pay taxes on their income. This article has been prepared to provide you with proper details on the subject of taxation on freelancing income.

Freelancing Income

According to the Income Tax laws in India, income earned by your intellectual or physical prowess is income from a profession and will be considered as "profits and gains of business or profession" and will be taxed accordingly.

The gross income of freelancers will be the sum of all receipts received in the course of their profession. If they have received all their business income through the banking system then their bank account details or account passbook is a document that freelancers can rely on to get and verify this information.

Expenditure allowed as a deduction

Freelancers can also enjoy the benefits of deducting the expenses incurred to complete the work from their income. However, these expenses should be directly related to the work you are doing.

Conditions for claiming expenses as a deduction from freelancing income

♦    The expenses should be directly related to the freelancing work being done.

♦    It is spent wholly and just for the purpose of the work

♦    It is spent during the tax year

♦    It should not be a capital expenditure or a personal expenditure of the freelancer

♦    It is not expended for any purpose which is an offense or prohibited by law

Expenses that can be claimed as deductions against income

♦    Property rental

♦    Expenses on repairing undertaken

♦    Depreciation

♦    Office expenses

♦    Expenses on Travelling

♦    Food, entertainment, or hospitality expenses

♦    Local taxes and insurance for your own business property

♦    Extra expenses like Domain registration and apps purchased for testing purposes

Total Taxable Income and Taxes Payable

A freelancer can reduce his/her tax expenditure by making full use of the deduction allowed under section 80. Section 80C of the Income Tax Act provides tax relief on certain expenses so that taxpayers can save more for the future. Net taxable income can be calculated by subtracting the deductions from gross taxable income.

Advanced Tax

If the total payable tax during a financial year surpasses ₹ 10,000, then the taxpayer will have to pay tax every quarter, this is called advance tax.

It can be calculated by determining total income, subtracting expenses, and then adding the income from other sources, finding the tax slab, and then deducting the TDS. If the tax due surpasses Rs 10,000 then you have to pay advance tax before the prescribed due dates.

Payment of advanced taxes can be done either through online mode through the website of the IT department or by filling a paper challan and depositing the tax by visiting your bank.

Interest under section 234B and section 234C is applicable in case of non-payment of your advance tax on or before the dates prescribed by the IT department.

Applicability of GST on Freelancers

1. If you sell Goods then the rate of GST will depend on the type of item you are selling.

2. If you are providing services then GST at the rate of 18% is applicable on most of the services. Since you are providing freelancing services, you have to charge 18% GST from the clients.

3. All the Invoices should be GST compliant.

4. If the total revenue from freelancing work does not exceed ₹ 20 lakhs, then GST is not applicable.

5. Freelancers are also eligible to avail of benefits under the composition scheme if they are selling goods or rendering services with a turnover less than the notified limit.

6. Good and service tax (GST) is not applicable on zero-rated supplies such as exports.

7. Once you get the GST Identification Number, it is mandatory for you to file the return.

FAQs

What if the expenses are common to both personal and professional purposes?

Only a fair portion of such expenses dedicated to your freelance work will be considered for deduction.

Which ITR freelancer needs to file?

Freelancers have to file income tax returns on ITR-4.

How to file GST returns?

A freelancer should file GST returns quarterly or monthly depending on turnover, and in case he/she has opted for a composition scheme. Composition dealers are allowed to file quarterly returns for supplies of goods having annual sales of less than ₹1.5 crores. For service providers, the limit is ₹ 50 lakh.

Should freelancers file TDS return?

Freelancers can get their payment after deducting tax at the source. Similarly, freelancers have to deduct tax at the source before making the payment.

(The Article is authored by Amit Gupta, MD, SAG Infotech & Edited by JK Jha)