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Taxation of Freelancers

There is no age limit for freelancing. A plethora of work opportunities, and the favourable tax rules, ensure that freelancing is now more fruitful than before, for those who wish to make a living out of it, or who do it part time.

The term "Freelancing" relates to self employment and consultancy. Freelancer is a person who is self-employed and generally works on project basis or assignment basis for clients. There is no need of special education or qualification for doing freelancing.

 

Freelancers who are into any of the specified or non-specified professions, get covered under the same rules as applicable to any other full-time specified or non-specified professional be it rules of computation of taxable income and tax liability, maintenance of books of accounts, presumptive tax, return filing etc.

 

Freelancing Income

Any income that a freelancer earns by displaying their  intellectual or manual skills is income from a profession according to income tax laws in India. Such income will be taxable as “Profits and Gains from Business or Profession”. Gross income will be the aggregate of all receipts received in the course of carrying out profession. Bank  statement is a document that can be relied on to obtain this information, provided all professional income have been received through banking channels.

 

If the total tax liability during a financial year exceeds Rs.10,000, the taxpayer is required to pay advance taxes every quarter.

 

Payment of Advance Tax

On or before 15th June

Not less than 15% of total advance tax required to be paid

On or before 15th September

Not less than 45% of advance tax as reduced by the tax paid in the last installment.

On or before 15th December

Not less than 75% of advance tax as reduced by the tax paid till the last installments.

On or before 15th March

The whole amount (100%) of advance tax as reduced by the tax paid till the last installments.

Expenses allowed as deduction

Freelancers can deduct expenses they incurred to do the job from their income. The business expenses can be in the form of  internet charges, telephone expenses, travel expenses and others. Depreciation on fixed assets is also allowed as deduction.

 

For some expenses that relate to both personal and business purposes, only a reasonable amount of the expenses and depreciation is allowed as a deduction, not the full amount. All the other deductions that are claimed by salaried people under Chapter VI A of the Income Tax Act can also be claimed by freelancers.

 

Section 80C of the Income Tax Act offers a deduction of upto Rs. 1.5 lakhs for payments made towards life insurance policies, provident fund, superannuation,tuition fees etc. Even health insurance premiums can be claimed as a deduction under Section 80D. Donations can also be claimed as deductions under Section 80G of the Income Tax Act.

 

TDS Deductions

The clients often deduct TDS when they make payment to a freelancer. The freelancer can use Form 26AS to see all the tax deducted online itself. The form 26AS is linked to the PAN number and helps to know all the TDS deducted.

 

Method of Accounting

The books of accounts of a freelancer can be maintained through two types of accounting methods:


a. Accrual basis of accounting

b. Cash basis of accounting

The accounting method used must be followed consistently by the freelancer.

GST for freelancers

 

1. When services are provided to foreign clients only
: It is not mandatorily required to register under GST till the Turnover of Rs. 20 Lakhs. Beyond this limit, GST registration needs to be taken and thereafter application for Letter of Undertaking (LUT) need to be done for not charging GST on output supply as export falls under zero rated supply. A person should register under GST for claiming back GST paid on input supplies used the for purpose of freelancing.

 

2. When services are provided to Indian clients within/outside the state: It is  mandatorily required to get registered under GST only if the turnover exceeds Rs 20 Lakh.

 

Forms to be used while filing ITR

A freelancer can use the form ITR 3 while filing the tax returns. If the turnover is more than Rs 50 Lakhs, books of accounts should be audited, according to the IT laws (Section 44AB). In this case, ITR must be filed before 31st September.

 

However,  if the turnover is less than Rs. 50 Lakhs and net profit is more than 50% of the turnover, then  no audit is required, and the last date for submission of ITR is 31st July.

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