“Income from Business and Profession” covers income earned from freelancing work under the Income Tax. Taxpayer can claim expenses on freelance income while filing their ITR. Freelancers/ Professionals also have an option to opt for the presumptive taxation scheme under the income tax act.
Expenses on freelance income that can be claimed:
- RENT: If you’ve set up your small office in rented premises. You can claim the rent paid as an expense from your income. If the property was rented for part of a year, No issues. In such cases, the freelancers may claim the actual amount of rent paid as an expense. It’s a good practice to keep the rent paid receipts on record for future references.
- REPAIRS: Nowadays, your laptop or workstation usually becomes your whole office and you need to take the utmost care of it. So if you have incurred any expenses on repairs of the laptop, furniture or any other equipment. You can claim them as a deduction. For example, any payments made in order to repair the lenses can be claimed as an expense if you are a freelance photographer.
- OFFICE SUPPLIES: Expenditure such as stationery for staff, tea coffee expenses, etc can also be claimed.
- ELECTRICITY: Deduction on electricty cost can be claimed from income. And in case you are working from home, you may claim the electricity expenses proportionally from your income.
- FUEL EXPENSES: If your work involves commutation, you can claim fuel expenses for the same. If in case the fuel expenses are not exclusively for the work purpose, you may claim the fuel expense proportionally.
- MEMBERSHIP FEES: The freelancer can claim the membership fees paid by him as an expense. The membership fees can be claimed only if it is related to his work purpose. For example, a writer can claim the amount paid for becoming a member of the writer’s club. However, if he pays membership fees of a golf club for his recreational purpose, it cannot be claimed.
- ADVERTISEMENT EXPENSE: So for example, if you are a website developer or a domain specialist. And you have advertised your talent at various websites to offer your services, you can claim these payments as expenses from your Income.
- BOOKS, MAGAZINES, REFERENCE MATERIAL: The freelancer can claim the expense of both books ordered for recreational purpose and reference purpose.
- TRAVELING EXPENSES: if as a freelancer, you need to travel to places. You can claim the traveling payments like tickets, meal expenses, stay expenses as a deduction from your income.
- DEPRECIATION: Depreciation means claiming the cost of the asset as expense over the life of the asset. As per the income tax act, we cannot claim the cost of the asset as an expense but we can always claim the depreciation on the asset as an expense. For example, You have purchased a high-end computer for Rs 10 lakhs. You can claim the deduction of the computer by way of depreciation at the income tax rates. The depreciation rate is 60%. Hence, you can claim 6 lakhs as depreciation in the 1st year (10,00,000*60%). And can carry forward the remaining amount to next year.
Points Freelancer/ Consultant should keep in mind:
- Preserves the bills/acknowledgments or any other proofs of the payments made.
- Maintain Books of Accounts for incomes earned during the year. However,
in the Case of freelancers/ Professionals, it is not mandatory to maintain books of accounts if turnover / gross receipts do not exceed Rs. 50 lakhs.
- It shall be noted that TDS is to be deducted where certain services are availed by the freelancer. For example, Mr. Vivek a freelance web designer obtained the services of a professional Chartered Accountant for auditing his books of accounts and other related services. Now while making payment to Chartered Accountant, Mr. Vivek shall deduct TDS u/s 194J and pay the amount net of TDS.
- As a freelancer, it is possible that you make a payment for expenses in cash. At that time one needs to keep in mind that cash payment made to a single person in a day does not exceed Rs. 20,000.
- You can also claim deductions under chapter VI-A of the Income Tax Act. You can claim deductions under section 80C from your salary for payment of ELSS, PPF, FD, etc. Also under section 80D, 80E, etc you can claim the payments made towards medical insurance premium and interest on an educational loan.
Freelancers must file an annual tax return on Income Tax Portal, if you overpay your estimated tax, you’ll receive the excess amount back in the form of a tax refund.
The same taxation slabs apply to the freelancing individuals as well. Incomes up to Rs 2.5 lakhs are not taxed upon, income between the values 2.5 lakhs to 5 lakhs are taxed @ 10%, 5 to 10 lakhs @ 20%, and above 10 lakhs @ 30%.
Presumptive taxation scheme (PTS) allows you to calculate your tax on an estimated income or profit. However, the assessee is allowed to willingly declare income at a higher rate than the minimum of 6-8% of the total turnover.