Income Tax for Freelancers, Consultants and Professionals

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Hiral Vakil

Income Source
Presumptive Tax
Section 44ADA
Section 80C
Section 80U
Last updated on April 28th, 2021

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. Just like every individual who receives income from salary, freelancers are also liable to pay income tax on their income. Some of the common professions for freelancing are:

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

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What does the Income of a Freelancer Include?

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.

Books of Accounts for Freelancers

There are two methods of accounting to calculate the income of the freelancer:

Accrual Basis v/s Cash Basis Accounting

Let us first understand these methods of accounting. Here are some other aspects of these methods of accounting the Income:

Accrual Basis Cash Basis
Incomes are accounted when the right to receive occurs Incomes 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 Income from 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 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.

Calculate Income for Freelancers

When it comes to Income Tax for Freelancers, here’s how taxable income is 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 INR 2,50,000.

Income Tax Calculator
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Income Tax Calculator
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Tax Payable for Freelancer

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

Due date of installment Advance Tax payable by Individual and Corporate Taxpayers
On or before 15th June 15% of the advance tax liability
On or before 15th September 45% of the advance tax liability
On or before 15th December 75% of the advance tax liability
On or before 15th March 100% 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 4 and will not be required to maintain books of accounts. In the case of freelancers opting for a presumptive taxation scheme, the Advance Tax will have to be paid in a single installment before 31st March of the Financial year.

ITR for Professions u/s 44ADA (Presumptive Scheme)
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ITR for Professions u/s 44ADA (Presumptive Scheme)
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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. Freelancers cannot claim Personal expenditure 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.

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 investments to PPF, NSCs, or paid life insurance premiums, 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

The government of India has made regulations by which an individual/company paying an individual or another company for services offered needs to deduct TDSIn the case of freelance TDS is deducted at 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 for this tax deducted from your final tax dues.

You can claim a refund from the Income Tax Department if your income does not exceed the Basic Exemption Limit. You can also 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

ITR Form and Document Checklist

Freelancers need to either fill out ITR 3 or ITR 4 and need to keep ready the documents required to file the ITR. ITR 3 applies to income from business and profession. However, professionals can opt for the presumptive taxations scheme and declare 50% of their gross receipts as their income by filing ITR 4 from the AY 2017-18.

Check which ITR Form to file?
Income Tax Return Forms to file depends on your Income Source, Residential Status, and other financial situation. Know which ITR Form you should file.
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Check which ITR Form to file?
Income Tax Return Forms to file depends on your Income Source, Residential Status, and other financial situation. Know which ITR Form you should file.
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FAQs

As a Freelancer, do I need to pay taxes?

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

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.

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.

Do freelancers need to maintain Book of Accounts?

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


Got Questions? Ask Away!

  1. Hi @Priyankur_Ghosh,

    As per the Income Tax Act, intraday trading is treated as Speculative Business Income, hence it is reported under the head ‘Income from Business and Profession’. If there are losses, the income would be negative and carry forward to 4 years.

    In case, you want to report your intraday trades under the head capital gains, you can do so by deleting them from the head - ‘Income from Business and Profession’ and manually adding them under ‘Income from Capital Gains’.

    Hope this helps :slight_smile:

  2. Hi @Priyankur_Ghosh,

    We are seeing some Reversal trades in your trading activity, to help you better understand can you please share your TaxP&L report downloaded from Zerodha Console on help@quicko.com.

    Also, we’d recommend you to mask / remove the data shared, since TaxQ&A is a public forum and it is not advisable to share your personal data.

  3. it assessee professional income above rs:50 lacs tax audit it returns filer gst exempted person 44 clause applicable or not applicable.
    expenses: telephone, salaries, electricity charges,pf,esi, rents,purchases of medicines, surgicial samans,depreciation,
    Question:
    how the fill procedure above expenses.

  4. Hi @Sundaraiah_Kollipara

    For professionals having gross revenue exceeding Rs. 50 Lakhs

    Add Regular Profession Income on Quicko

    • In the Filing tab, navigate to INCOMES > BUSINESS & PROFESSION from the side nav
    • Click on Regular Profession Income
    • Enter the Profession Details and save

    To further add expenses, you may refer to this article Add Business & Profession Expenses.

    Hope this helps.