Guide: Income Tax for Freelancers and Professionals

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By Hiral Vakil on March 8, 2019

Who is a freelancer?

Freelancer is a person who is self-employed, and have the freedom to choose their projects and companies they would like to be associated with. Some of the common professions for freelancing are a writer who has the ability to submit their work to many different places, without being tied to any one company, a software developer, a photographer, an interior decorator, fashion designer, a blogger, a gym instructor, etc.

Freelancers don’t earn a salary but run a business. The benefit that a freelancer gets while preparing tax details is that expenses of a freelancer are allowed to be deducted from freelancer’s income.

The income of Freelancer includes:

The sum of all the money one received against the work done is called gross receipt. If your receipts are received in a bank account then sum them up from your bank account statement. If you have received some money as loan from relatives or friends than it does not count as your income. Payment received towards freelancing work is considered as income from freelancing.

Income received from other sources such as interest on FD, rent from property are not included in the freelancing income. Such incomes are part of other heads of income in your return.

How is Freelancing Income calculated?

There are two methods to calculate the Income of the freelancer.

  • Accrual Basis of Accounting- Here, the income is accounted when it’s due.
  • Cash Basis of Accounting- Here, the Income is accounted only after it’s actually received.

Here are some other aspects of these methods of accounting the Income:

Accrual BasisCash Basis
Incomes are accounted when the right to receive occursIncomes are accounted only when the cash is actually received.
For Example, you raise an invoice on your client on 7th February but receive the payment on 10th April, revenue would be booked in your accounts on the basis when invoice is raised to the client i.e, 7th February.Now, in the same case if it’s Cash Basis of Accounting, revenue would be accounted for only on 10th April (the tax year next to the year in which invoice was raised or work got completed) when payment is received.
Similarly, expenses are accounted right when the obligation is incurred.Expenses are accounted only after they’re paid off.
For Example, your Internet bill dated 18th February to 18th March has been received. This will be captured as an expense in the accounts of March, even if you don’t pay this until 31st March (even in the next tax year). Note that on an estimated basis your Internet cost for remaining 13 days of March may also be accrued when your books of accounts are closed on 31st March.Here, the same Internet bill will be booked as an expense in the month of March only if you pay it before the 31st March (in the same tax year). If you pay it in April, it will get booked as an expense in the next tax year (even when the expense pertains to the previous tax year)
Tax liability is considered for the booked income. So even the income yet not recieved may be liable for Tax.As here, the income is not booked until actually receiving it, the income not received yet will not be liable for Tax
This method can be followed for all types of income. In fact, it’s commonly used for Salary, House Property and Capital gains.This method is only applicable to ‘Profits and gains from Business and Profession’ and income from ‘Other Sources’.

It should be kept in mind that once you select a method of accounting, you’re not easily allowed to change it. You need to continue with it. That’s why, it is very important to consider the pros and cons of both the methods.

The Cash basis of accounting may seem a preferable option from the two, but one must consider that in the long run, it doesn’t help much with tax reduction, instead, it just postpones that particular amount of tax to the next year. If your payment receipts are not so irregular, Accrual Basis is a much logical option. The tax calculation can be done properly for the given year.

How’s the Tax calculated on Freelance Income?

When it comes to the taxable Income in Freelance Income, here’s how it’s calculated:

[Net Taxable Income = Gross Taxable Income – Deductions]

You’re liable to pay tax if your age is less than 60 years and your total taxable income is more than 2,50,000.

Now, if the total Tax Liability exceeds Rs. 10,000, the taxes are supposed to be paid every quarter. This is called Advance tax. Here’s how to calculate Advance tax

  • Add up all your payments and determine your Total Income.
  • Subtract all the work-related expenses.
  • Add income from other sources if any.
  • Identify your Tax slab and calculate your Tax due. (Deduct TDS)
  • If this Tax Due exceeds Rs. 10,000, you need to pay Advance Tax by Due dates given below:
Due date of installmentAdvance Tax payable by Individual and Corporate Taxpayers
On or before 15th June15% of the advance tax liability
On or before 15th September45% of the advance tax liability
On or before 15th December75% of the advance tax liability
On or before 15th March100% of the advance tax liability

Freelancers and Professionals can opt for presumptive taxation scheme u/s 44ADA with effect from AY 2017-18. As a result, they can file ITR-4S and will not be required to maintain books of accounts. In case of freelancers opting for presumptive taxation scheme, Advance tax will have to be paid in a single installment before 31st March of the Financial year.

Freelancing Expenses allowed as a deduction:

Freelancers can deduct expenses incurred exclusively towards the freelancing work. This could be anything from office rent, furniture or expense on a visit to a client. Personal expenditure of freelancer is not allowed as deduction. For example: If you are an app developer, you can deduct expenses on testing app and software purchase. If you have certain expenses like a cost of high speed internet connection that you use both for the personal and professional purpose you can allocate a reasonable percent to your freelancing work and deduct them.

  • Rent Expenses
  • Electricity Expenses/ Telephone Expenses/ Internet Expenses
  • Petrol/ Diesel Expenses
  • Travel Expenses relating to freelancing work
  • Local taxes and insurance of your business property
  • Meal, entertainment or hospitality expenses incurred on client
  • Depreciation on capital asset purchased for work( laptop, printers, car)
  • Office Expenses
  • Any other expenses incurred for the purpose of earning revenue

Deductions allowed under section 80C to 80U

Just like any salaried person, a freelancer can claim all the deductions listed under section 80, by fulfilling the conditions listed therein. For example if you have made an investments to PPF, NSCs or paid life insurance premium, you can avail deduction under section 80C. In case of any medical premium paid by you, you can claim deduction under section 80D.

TDS for Freelancers

Government of India has made regulation by which an individual/company paying an individual or another company for services offered needs to deduct TDS. TDS in case of freelance should be deducted @ 10%. Individual/company from India having valid Tax Deduction Account Number(TAN) can only deduct TDS from your earnings. Unless your client has a TAN they are not eligible to deduct any TDS from your earnings. In many cases companies/individuals from outside India won’t have TAN, no TDS is applicable. In that case, depositing Advance Tax becomes freelancers liability. If any of your clients have deducted TDS on payments made to you, you can take credit of this tax deducted from your final tax dues.

If in a given financial year, your income does not exceed the basic exemption limit then deducted TDS from earnings can be claimed as refund from Income Tax Department. Since TDS was deducted at source without knowing how much your total income from the year would be, you can become eligible for a refund in case the total TDS exceeds the amount of your tax liability.

Here are the other taxes applicable to Freelancers:

  • Service Tax
  • Excise Duty
  • Sales Tax

Frequently Asked Questions

1. As a Freelancer, do I need to pay taxes?

Yes, absolutely. You need to pay taxes and file your income tax returns if your total income for a particular financial year exceeds the Basic Exemption Limit prescribed by Income Tax Department

2. Which ITR do freelancers need to file?

A person earning on his own is considered a Sole Proprietor and needs to file ITR-4. If you have any other income source, you need to include that as well while filing your Income Tax Return.

3. Is Advance Tax applicable to Freelancers?

If the total tax liability during the financial year exceeds Rs.10,000, the taxpayer is required to pay taxes on quarterly basis. Hence, freelancers also need to pay advance tax if their total tax liability exceeds Rs.10,000.

4. Do freelancers need to maintain Book of Accounts?

Yes. In order to calculate their taxable Income, the Freelancers need to maintain them. In fact, the Income Tax Act has specified the books of accounts under section 44AA and Rule 6F.