How to reduce tax from freelancing job.

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Farhan Ghumra (Querist)
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28 January 2014 Hi,

I am software developer. I work for an company in day time & in my free time, usually weekend & night I do freelancing on Elance.com, oDesk.com & freelancer.com Now I know that if I withdraw the funds to my bank account, my PAN will have record of it so I need to pay tax for that.

What if I use my relatives' bank accounts, who are unemployed, to withdraw the fund. Will I save from more tax? Is it legal?

The freelancing websites don't have my PAN. If I withdraw via PayPal it has PAN. So is it possible to divide my freelancing income by withdrawinf fund in multiple accounts?

Thanks!

CA Mahavir Shah

CA Mahavir Shah (Expert)
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29 January 2014 Hi Farhan,

Its really good to know that you are working as a freelancer.

For Tax Planning kindly contact us.

Farhan Ghumra

Farhan Ghumra (Querist)
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29 January 2014 @Mahavir

I am not here to get paid service. I am asking the experts who solve question in free, don't market yourself here.

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Asha Kanta Sharma

Asha Kanta Sharma

(Expert)
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28 July 2024 To manage your tax obligations while freelancing, it's crucial to follow legal and ethical guidelines. Here’s a detailed overview of how to handle your freelance income and minimize your tax burden:

### **1. Understanding Tax Obligations for Freelancers**

**1.1. Taxability of Freelance Income:**
- Freelance income is considered as income from profession under Section 44ADA of the Income Tax Act.
- The income is subject to tax as per the applicable tax slabs, and you need to declare it while filing your income tax return.

**1.2. Record Keeping:**
- Maintain detailed records of all your freelance earnings and related expenses. This includes invoices, payment receipts, bank statements, and expense vouchers.

### **2. Legal and Ethical Practices**

**2.1. Using Multiple Bank Accounts:**
- Using multiple bank accounts to withdraw funds does not exempt you from tax liability. The income must be declared regardless of which account it is deposited into.
- Using relatives’ bank accounts to avoid tax is illegal and can be considered as tax evasion. Both the income and the transactions can be tracked by tax authorities, and such actions can lead to legal consequences.

**2.2. PAN and PayPal Withdrawals:**
- PayPal transactions are linked with your PAN and will be reported to tax authorities.
- Splitting income across multiple accounts does not negate your tax liability. The primary concern is to ensure that all income is accurately reported and taxes are paid accordingly.

### **3. Strategies to Minimize Tax Legally**

**3.1. Claiming Expenses:**
- Deduct all legitimate business expenses from your freelance income. These might include:
- Software and tools
- Internet and phone bills
- Office supplies
- Travel expenses related to freelancing

**3.2. Tax Deductions:**
- Utilize tax deductions available under Section 80C (e.g., investments in PPF, ELSS) and other applicable sections to reduce your taxable income.

**3.3. Presumptive Taxation Scheme:**
- If your gross receipts do not exceed ₹50 lakhs, you can opt for the presumptive taxation scheme under Section 44ADA. Under this scheme, you can declare 50% of your income as taxable and the remaining 50% is considered as your expenses. This simplifies the process but ensure you comply with the requirements.

**3.4. Income Splitting:**
- If you have a spouse or family member who is in a lower tax bracket, consider structuring the income in a manner that optimizes tax benefits. However, this should be done within the legal framework and with proper documentation.

### **4. Filing Tax Returns**

**4.1. Accurate Reporting:**
- Report all freelance income accurately while filing your income tax return. Ensure that you include income from all sources and claim deductions correctly.

**4.2. Advance Tax Payments:**
- If your total tax liability exceeds ₹10,000, you are required to pay advance tax in four installments throughout the year. Calculate and pay advance tax to avoid penalties.

**4.3. Professional Advice:**
- Consult with a tax professional or accountant to ensure you are taking advantage of all available deductions and to comply with tax laws.

### **5. Practical Example**

Assume you are a software developer with freelance earnings of ₹5 lakh annually. Here’s a simplified approach:

1. **Income Calculation:**
- Total Freelance Income: ₹5L

2. **Claim Expenses:**
- Software Costs: ₹20K
- Internet & Phone Bills: ₹15K
- Office Supplies: ₹10K
- Total Expenses: ₹45K

3. **Taxable Income:**
- Net Freelance Income: ₹5L - ₹45K = ₹4.55L

4. **Tax Deductions:**
- Claim deductions under Section 80C and other relevant sections.

5. **Tax Filing:**
- Report the net income and pay tax accordingly. Consider advance tax payments if applicable.

### **Conclusion**

To manage your tax obligations effectively and legally:
- **Declare all income** from freelancing accurately.
- **Maintain proper records** and claim all legitimate business expenses.
- **Avoid using relatives' accounts** for transactions to evade taxes.
- **Consult with a tax professional** for personalized advice and to ensure compliance with tax laws.

By following these steps, you can minimize your tax burden while staying compliant with legal requirements.