India is home to the third largest number of freelancers in the world. Many people have been motivated to explore their entrepreneurial side due to the COVID lockdowns. People have started various businesses like selling home-cooked food, skills training, programming, designing, and animation, or taking gigs such as videography, fitness training, and content creation. When compared to a salaried taxpayer, tax aspects become slightly more complex for self-employed individuals. Any income generated by a freelancer or a self-employed taxpayer is taxable under the head "Profits and gains from business and profession". Taxpayers have two options to pay taxes - either by offering to tax the profits earned by them after deducting allowable expenses or by opting for presumptive taxation if they meet the necessary conditions. For example, a resident individual who engages in professions with total gross receipts less than INR 50 lakhs during the relevant tax year can opt for presumptive taxation. Under this scheme, 50% or higher of the total gross receipts of the individual in the previous year from such profession will be deemed to be the profits from that profession. If the taxpayer offers lesser profits than these for the relevant year, they should maintain proper books of accounts, get them audited, and furnish an audit as prescribed in the Act.
Here are some points to keep in mind while filing a tax return as a freelancer or self-employed individual
1. Determine your tax filing obligation
You are required to file an income tax return if your total income during the relevant financial year is more than the basic exemption limit, which is currently INR 2.5 lakhs for FY 2022-23. If your income is below this limit, you can still file a tax return voluntarily.
2. Understand the due date for filing tax return
The due date for filing the tax return for freelancers and self-employed individuals who are not required to get their books of accounts audited is July 31, 2023. However, the due date for those who are required to get their books audited is October 31, 2023. If you miss these deadlines, you can still file the tax return until December 31, 2023, but with a late filing fee.
3. Know the tax rate applicable to you
The tax rates for freelancers and self-employed individuals are the same as for salaried employees. However, you can choose to opt for a simplified tax regime if you meet certain conditions. The taxes you owe will be increased by applicable surcharges (ranging from 10% to 37%) and a health and education cess of 4%. If your total income is less than INR 5 lakhs, you may be eligible for a tax rebate of INR 12,500.
4. Be aware of the requirement of a tax audit
If your gross annual turnover exceeds INR 1 crore, you will need to get your books audited. This threshold is INR 10 crore if your cash receipts are restricted to 5% or less of the total turnover and payments are restricted to 5% of the total payments. You may also be required to undergo a tax audit if you carry on a business specified for presumptive taxation but offer to tax income lower than the limits specified for therein, and your income is more than the taxable limit during the relevant tax year. The threshold for professional receipts for such an audit is INR 50 lakhs.
5. Use the correct tax return form
If you have income under the head “Business or profession,” you should file your tax return using either ITR 3 or ITR 4. If you meet certain conditions, you should file using ITR 4. The tax authorities have released offline income tax return forms for FY 2022-23, and online forms will be available at the end of the year.
6. Keep all necessary details ready
When filing your tax return, you should have personal information such as your address, contact details, bank accounts, Aadhaar, etc. You should also have details of your gross receipts, expenses, other incomes, eligible tax-saving investments made during the year, and tax audit report, if any. Additionally, you should have financial particulars such as your assets (both Indian and overseas), bank balances, cash balance, debtors, creditors, loans and advances, any other liabilities, and capital balance. Finally, you should have Form 16, 16A, 26AS, and Annual Information Statement (AIS) handy, as well as look through Form 26AS and AIS from the income tax e-filing portal and reconcile the income offered for tax and the details reflecting in these statements.
When ITR 4 should be used?
ITR 4 is a tax return form applicable for taxpayers who have income under the head "Business or profession". However, taxpayers meeting certain conditions are required to file their tax returns using ITR 4. These conditions are:
1. The taxpayer has opted for presumptive taxation.
2. The taxpayer's taxable income does not exceed INR 50 lakhs during the financial year.
3. The taxpayer does not have income under the head "Capital gains".
4. The taxpayer does not have any assets or income outside India.
5. The taxpayer has no more than one house property.
If the taxpayer meets all of the above conditions, they are required to file their tax return using ITR 4. This form allows the taxpayer to report their income, expenses, and eligible tax saving investments made during the year, and also requires the taxpayer to provide financial particulars such as assets, bank balances, loans and advances, and any other liabilities along with capital balance.
Conclusion
In conclusion, filing your income tax return as a freelancer or self-employed individual can seem daunting, but it is an essential part of maximizing your earnings and managing your finances effectively. By keeping accurate records, understanding the tax laws, and taking advantage of deductions and exemptions, you can minimize your tax liability and keep more of your hard-earned money.
Remember to keep track of all your income and expenses throughout the year and to file your tax return on time to avoid penalties and interest charges. Consider consulting with a tax professional or using tax software to ensure that you are taking advantage of all the available tax breaks and that your return is accurate and complete.
In the end, filing your income tax return as a freelancer or self-employed individual is not only a legal requirement, but it is also an opportunity to optimize your finances and keep more of your earnings in your pocket. So, take the time to understand the tax laws and regulations, and start preparing for the upcoming tax season today. Your wallet will thank you.
The author is a Chartered Accountant with 2 decades of experience into Accounting, Taxation, Auditing, Risk & Compliance, Credit Controls, Due diligence. Currently, the author is the founder and managing partner at RRL Global services.
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