What is freelancing income?
Freelance income includes earnings that you generate from completing freelancing tasks. Freelancing is a form of self-employment as you are not hired by the company or placed on its payroll.
You won't receive any benefits (like PF) that the Company Act requires since you are not an employee of any company you work with. So, you work as a third-party contractor which also means the company, or your client, don't always get to govern your working hours or the place of work. For example a freelancer could complete their freelance writing task at a cafe or at home.
The total of all the Gross receipts you receive from freelancing is your gross income. You can rely on your bank account statement to extract information about receipts.
How to claim expenses as a freelancer?
The Income Tax Act only accepts a reasonable part of business expenses as a deduction and not the entire amount.
Disallowed expenses
The Income Tax Act disallows you to deduct the following expenses from your income:
- Any income tax you paid
- Cash payments for expenses more than INR 10,000
- Any interest, fine, or penalty for failing to pay taxes on time
- Payments made to family members. You are not allowed to deduct these payments in specific circumstances. For example, when a family member (or a spouse) receives payment. It can also be for someone who owns a significant percentage (20% or more) of your business profits.
How much tax is applied to freelancers in India?
The average freelancer's income in India can vary a lot depending on their expertise and industry. This can in turn affect the amount of tax applied to a freelancer. The amount of income you earn plays a key role when calculating taxable income.
Freelancers can calculate income tax on a presumptive basis if they receive less than 50 lakhs in Gross Receipts. In this case, the tax amount becomes equal to 50% of the total Gross Receipt.
If Gross Receipts exceed 50 lakhs, a freelancer may maintain a book of accounts.
In case, the net profit is less than half of their Gross Receipts, the difference between Gross Receipts and business expenses will represent the taxable amount.
The exact tax percentage will depend on the tax slab your taxable income falls in.
For instance, if you made 20 lakhs in a year, then your taxable income will be 10 lakhs (50% of the total Gross receipt). Therefore you will have to pay 15% tax on your taxable income, which is 10 lakhs.
What are the different tax deductions that Indian freelancers can use?
Some of the exemptions and deductions that freelancers can use include:
- Section 80 C - Offers freelancers tax deduction of up to INR1.5 lakhs on investments towards schemes like ELSS, ULIP, FDs and payments such as tuition fees.
- Section 80 CCC - Tax deduction is available against pension plans with a limit of INR 1.5 lakhs
- Section 80 CCD - Deductions on investments in the Central Government Pension Schemes
- Section 80 CCF - Exemption for investment towards long-term infrastructure bonds of up to Rs 20000
- Section 80 CCG - Exemption of up to INR 25,000 on investment in government Equity Savings Scheme
- Section 80 D - Deductions on the expenses for payment of premiums for health insurance
- Section 80 DD - Exemption on treatment for normal or severe disabilities which can be up to INR 1.25 lakhs
- Section 80 G - 100% deduction on donations to charitable trusts and relief funds.
- Section 80 E - Tax deduction is available towards education loans
- Section 80 EE - Provides tax benefits against payment made towards a residential loan- available for upto INR 50,000
What is the taxable income for a freelancer?
Taxable income is the sum of all income on which income tax is charged. It varies depending on an individual's earnings. Tax brackets are applied according to the total taxable income.
How to calculate taxable income for freelancers?
There are two ways to calculate taxable income for freelancers
Presumptive Tax Calculation
If your Gross Receipts are less than INR 50 lakhs, you can use a presumptive basis under Section 44ADA to calculate the taxable income. For freelancers, the presumptive assumption rate is 50%.
Taxable Income = 50% of Gross Receipts
It is not necessary to keep books of accounts or have them audited by a CA if you are under this section.
Net Taxable Income from Profit & Loss Account
This method is more preferable if the net profit is less than half of the annual Gross Receipts.
Net Taxable Income = Gross Taxable Income - Deductions
Filing ITR for freelancers
- Knowing the right way of filing ITR is a major process to understand.
- Even if a salaried person has earned extra income from freelancing outside of their job, they still need to pay taxes over their total income.
- Freelancers earning in India can only choose between ITR-3 or ITR-4.
How to file ITR as a freelancer?
The process of filing an income tax return for freelancers might seem a bit complex, but it becomes easier as you break the whole thing down. Here's the step by step process to go about it.
1. Calculate the gross income for the financial year from 1st April to 31st March. (This would be the total payments received from clients). You can also just download yearly account statement as an Excel file to make the calculations easier.
2. Mark your freelance business expenses to request a tax deduction
3. Select the appropriate form which can either be:
Form ITR-3
This is for freelancers who get business profits. This can include income from capital gains, house property or salary/pension.
Form ITR-4
This form is for those who select a presumptive income scheme under IT Act Sections 44AD and 44AE. It is applicable if freelancers work in a profession under Section 44ADA. It also applies if they have a business income as outlined in Section 44AD or 44AE.
The Income Tax Return ITR Form -4 is meant for small business owners that don't maintain any books, but do maintain a sales ledger. Freelancers like online content writers in India, bloggers, and vloggers have to file the ITR 4 form.
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