The presumptive taxation scheme was introduced by the Income Tax Act, 1961 to give relief to small taxpayers from the tedious job of maintaining books of account and from getting the accounts audited. Generally, a person who receives income from a business or profession maintains books of accounts and prepares a balance sheet to understand the financial position of their business or profession over the financial year.
Any individuals, HUF, or partnership firms who avail presumptive taxation scheme can declare income at a predefined rate. Thus, they need not go through the cumbersome task of maintaining books of accounts and audit. Following are the presumptive taxation schemes available to small taxpayers as per Income Tax Act:
Section 44AD for small businesses
Section 44ADA for professionals
And, Section 44AE for businesses engaged in plying, hiring or leasing of goods carriages
Presumptive Taxation Scheme for Business
This scheme is designed to give relief to small taxpayers engaged in any business from maintaining any books of accounts. However, it does not include the business of plying, hiring or leasing of goods carriages referred to in section 44AE. Further, the Income Tax Provisions for maintaining books of accounts under Section 44AA & Audit under Section 44AB will not apply. The following assessees can avail Presumptive taxation under section 44AD:
Non-ResidentIndians(NRI) can not avail of the benefit of this scheme. Also, a person who has made any claim towards deduction under section 10A/10AA/10B/10BA or under section 80HH to 80RRB in the relevant year is not eligible for this scheme.
Presumptive Taxation Scheme for Professions
Earlier professionals were kept out of presumptive taxation scheme. However, in budget 2016 the government has extended a presumptive taxation scheme to the professionals too. Hence, professionals can also opt for presumptive taxation under section 44ADA. This benefit is available from FY 2016-17 onwards.
An assessee in a specified profession having gross receipts up to INR 50 lacs, can opt for Presumptive Taxation under Section 44ADA. It saves them from the burden of maintaining books of accounts and go for tax audit as per Section 44AB.
Presumptive Taxation Scheme Under Section 44AE
The scheme of section 44AE is designed to give relief to small taxpayers engaged in the business of plying, hiring or leasing of goods carriages.
Eligible Business as per Section 44AE
A person who engages in the business of plying, hiring or leasing of goods carriages and who does not own more than 10 goods vehicles at any time during the year. Including carriages taken on hire purchase or no installments.
The provisions of section 44AE are applicable to every person (i.e., an individual, HUF, firm, company, etc.).
Characteristics of the Scheme u/s 44AE:
A taxpayer doesn’t have to maintain books of accounts under section 44AA.
Turnover from a business should not exceed INR 2 Crore (INR 1 Crore until FY 2015-16)
Net Income from a heavy goods vehicle will be taken as INR 7,500 per month for each vehicle
A taxpayer will not be able to claim any business expenses against the income.
Yes. With effect from the Financial year 2016-17, any professional be it a doctor or a chartered accountant or a lawyer can opt for Presumptive taxation scheme u/s 44ADA. However, the only condition is that the income from such a profession should not exceed INR 50 lacs and profits will be taken as 50% of such professional receipts.
Which businesses are not eligible for presumptive taxation scheme?
The scheme of section 44AD is designed to give relief to small taxpayers engaged in any business, except the following businesses: 1. Business of plying, hiring or leasing goods carriages as per Section 44AE. 2. A person who is carrying on any agency business. 3. A person who is earning income in the nature of commission or brokerage 4. Any business whose total turnover or gross receipts exceeds two crore rupees.
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:
a software developer,
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 income tax details is that expenses of a freelancer are allowed to be deducted from freelancers’ income.
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 of Accounting: Here, the income is accounted for when it’s due.
Cash Basis of Accounting: Here, the Income is accounted only after it’s actually received.
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:
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
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.
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.
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.
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)
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 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 TDS. In 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.
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.
However, if the turnover of the mentioned business exceeds INR 2 crores (INR 50 lakh in the case of professionals), the taxpayer will have to file ITR 3. You can also download income tax utility from the income tax department website.
Up to FY 2018-19 (AY 2019-20), it was not mandatory to file Income Tax Return if the total income was less than the basic exemption limit. However, Budget 2019 inserted the seventh proviso to Section 139(1). As per this new provision, if a taxpayer has entered into high-value transactions, it is mandatory to file the ITR even if the total income does not exceed the basic exemption limit. The high-value transactions can be either of the following:
If the taxpayer has deposited more than INR 1 Cr in a current account
If the taxpayer has incurred foreign travel expense of more than INR 2 lacs
Or, if the taxpayer has incurred electricity expense of more than INR 1 lac
Who can file ITR 4?
Individual/HUF/Partnership firm whose total income includes following can use this form:
The ITR 4 has six sections that are required to be filled. These sections are as follows:
Gross Total Income
Total Tax Liability
How to file the ITR 4?
You can either file your ITR 4 physically or electronically. Since the Financial year 2013-14, electronic filing of ITR 4 has been made compulsory for the taxpayers who:
Have an income of more than INR 5 Lakhs.
Have any assets outside of India, including financial interest in any entity; or signing authority in any account outside of India
Those claiming relief under Section 90/90A/91 to whom Schedule FSI and Schedule TR to apply
In case of Physical submission:
You can submit the ITR 4 in paper form or
You can submit the bar-coded return form duly filled.
The department will provide you with an acknowledgment along with stamp of submission on your copy.
File ITR 4 Online using Income Tax Website
Log in to the e-filing portal using your user ID & password.
Click on e-file > Income Tax Returns > File Income Tax Return from the dashboard
Select the appropriate assessment year
Select the online mode of filing the ITR
Select the applicable status and click on proceed
Select the ITR 4 option from the list provided
Read the instructions and click on the option to proceed
Select the options that are applicable to your particular situation and click on proceed
Review the prefilled data and click on proceed
Enter your income and deduction details in the different section
You will be shown a summary of your tax computation based on the details you provided. If there is tax liability payable based on the computation, you will receive the option to pay instantly or pay later
After paying tax, click Preview Return. If there is no tax liability payable, or if there is a refund based on tax computation, you will be taken to the Preview and Submit Your Return page
Once validated, on your Preview and Submit your Return page, click Proceed to Verification
On the Complete your Verification page, select your preferred option and click Continue
ITR 4 for AY 2021-22
Major Changes in ITR 2 for AY 2021-22
Taxpayers are given the option to choose between the old tax regime and the new tax regime
Advance tax is the “Pay as you earn”tax that has to be deposited to the Income Tax Department during the financial year. This ensures that the government can collect more uniformly throughout the year.
The ITD will now send the taxpayers a mail with the details of the amount of advance tax that was paid over each quarter which would help the taxpayers to reconcile with their records for the same.
What is Advance Tax?
It is a part payment of your tax liability before the end of the financial year. Another name for it is – “pay as you earn scheme” where the income tax should be paid in the year in which the income is received.
Union Budget 2021 Update
Advance Tax liability would arise on dividend income only once the dividend is declared or paid since it is difficult for the shareholders to estimate the dividend income accurately.
Who is required to Pay Advance Tax?
Every person whose tax liability for a financial year exceedsINR 10,000 has to pay it on an installment basis. Income from all the different heads are added to calculate the advance tax.
In the case of a person having income from salary, the employer calculates the tax on salary. He is responsible to deduct tax (TDS) from your salary income and deposit the same to Government. So a salaried person does not have to pay this tax on salary income.
However, if a salaried person is having income other than salary (for eg. rental income from house property or interest from fixed deposits etc.), and if tax liability on such income exceeds INR 10,000 then the taxpayer has to pay advance tax. It is very common for salaried people to have alternate income sources and as a result, they would become liable to pay this tax.
For Presumptive Taxation
Up until FY 2015-16, assessees opting for presumptive taxation scheme were not required to pay advance tax. However, with effect from FY 2016-17 (AY 2017-18), assessees opting for presumptive taxation scheme will have to pay the tax amount in a single installment on or before 15th March. From FY 2016-17 (AY 2017-18), Freelancers and professionals can also opt for the presumptive taxation scheme and avoid the cumbersome tasks of maintaining books of account and audit.
The “Pay-as-you-earn” liability for the presumptive taxation scheme is to be calculated and paid only once before the end of the financial year. Here is how the tax should be calculated for the presumptive taxation scheme:
Advance tax liability
8% of Turnover or Gross receipts
Tax at slab rates on presumptive income (flat 30% in case of partnership firm)
50% of professional fee receipts
Tax at slab rates on presumptive income (flat 30% in case of partnership firm)
Freelancers and professionals who do not opt for the presumptive taxation scheme have to calculate and pay this tax on an installment basis. They have to estimate their annual income and calculate the tax on the same because in most cases TDS which is deducted by their customers/clients while making payments, is not enough to meet the total tax liability.
Advance Tax Calculation
Time needed: 10 minutes.
Estimate your income
Estimate your income from business or profession. Add all the incomes from ongoing projects or assignments whose fees are already determined. Also, add the incomes which are expected on the basis of ongoing interactions with clients/customers.
Subtract eligible deductions and expenses
Deduct all eligible deductions such as tax-saving investments and payments (under the old tax regime) and expenses from your total estimated income. You can deduct the expenses which are directly related to your business or profession. Rent, electricity, legal and professional fees, books, fuel expenses, the salary of employees, depreciation, etc. are some of the expenses which are allowed to be deducted from the income.
Calculate the tax liability
Add incomes from remaining sources like house property, capital gains, income from other sources, etc. Then calculate the tax liability for your total income on the tax slab rates and deduct the TDS which has already been deducted from your income.
Deduct Taxes Paid
Refer to your Form 26AS and deduct all taxes paid such as TDS deducted and deposited on your behalf, previous advance tax installments paid during the financial year.
Assess your tax liability
If the resulting tax liability is more than INR 10,000 then you are required to pay advance tax on an installment basis as per the schedule given below.
Advance Tax Due Dates
Due date of installment
Advance Tax payable by Individual and Corporate Taxpayers
In the case of salaried individuals, TDS is deducted from their salary and deposited to the government by their employer. So as far as salary income is concerned, they are not required to pay advance tax. However, for all the incomes other than salary, if the total of such incomes exceeds INR 50,000 then they will have to assess the tax liability on the same and pay tax.
How do I determine whether I am liable to pay advance tax or not?
Before every due date for payment of advance tax, you will have to calculate your expected annual income and determine the tax liability on the same. If your total tax liability exceeds INR 10,000 then you are liable to pay it as per the schedule has given above.
How to pay advance tax?
There are two ways of tax payment: – Deposit in the bank with advance tax challan or – Online payment using Net banking facility
What if I don’t pay advance tax on time?
As mentioned above, if you fail to pay advance tax or make a late payment of it, you will have to pay penal interest. Under section 234B, interest for default in payment of advanced tax is levied at 1% simple interest per month or part of a month