Need some advice on tax laws for freelancing

This query is : Resolved

Arun Crypto (Querist)
Follow

26 September 2011 About me:

1. I receive X amount of INR in my bank accounts (more than one account) every week for freelancing work (software).
2. I also work as a full time employee in a software firm which deducts my tax at source for my income from the firm.

My friend CA says

"As per section 44AD if your gross receipt during the previous year does not exceed Rs. 60Lakhs then 8% of your receipts shall be deemed to be income chargable under the head Profits and Gains from Business or Profession. You are not required to pay advance tax in respect of such business."

Questions:
1. Is my friend correct about this? Or should i pay for what ever i earn fully?
2. Should I pay any advance tax? (I did pay a little sum as precautionary)
3. Is it true that freelancers escape from paying taxes without showing these information to the govt? How does government track them? I would like to know both IDEAL rules and PRACTICALLY how people treat this.

C A S.S.Agarwal, M.Com.,LL.B,

C A S.S.Agarwal, M.Com.,LL.B, (Expert)
Follow

07 October 2011 Yes
Yes
In your case your freelancing business is not a big business and once it grows big then you will not be able to prove that you have earned this much income provided that that very amount as declared by you is lying in the bank account after meting necessary expenses

Arun Crypto

Arun Crypto (Querist)
Follow

07 October 2011 Can you answer my questions one by one? I didn't get you clearly.

Upgrade to CAclubindia Pro. Subscribe Now!

Asha Kanta Sharma

Asha Kanta Sharma

(Expert)
Follow

03 August 2024 ### Tax Laws for Freelancing in India

Freelancers in India need to adhere to specific tax rules and regulations. Here’s a detailed explanation addressing your queries:

#### 1. **Section 44AD and its Applicability**

**Section 44AD** of the Income Tax Act provides a simplified tax regime for small businesses, including certain freelance professionals. Here’s how it applies:

- **Eligibility:** Section 44AD applies to individuals, Hindu Undivided Families (HUFs), and partnership firms (excluding LLPs) with gross receipts not exceeding ₹60 lakhs in a financial year.
- **Income Calculation:** Under this section, 8% of the gross receipts (or 6% if receipts are received through digital means) are deemed as income. This deemed income is charged under the head "Profits and Gains of Business or Profession."

**Your friend’s advice is accurate if:**
- **Your gross receipts are below ₹60 lakhs.** If this condition is met, you can opt for the presumptive taxation scheme under Section 44AD, and you would only need to show 8% (or 6%) of your gross receipts as income.

However:
- **If you receive more than ₹60 lakhs in gross receipts**, then Section 44AD will not be applicable, and you will need to maintain detailed books of accounts and pay tax on the actual income.

#### 2. **Advance Tax and Payment**

- **Section 44AD:** If you opt for the presumptive taxation scheme under Section 44AD, you are not required to pay advance tax. However, if you expect your total tax liability (including your income from employment) to exceed ₹10,000 in a financial year, you should pay advance tax as a precautionary measure.

- **Without Section 44AD:** If your receipts exceed ₹60 lakhs, or if you choose not to opt for Section 44AD, you will need to maintain detailed records and pay tax on your actual income. You are required to pay advance tax in this case based on your estimated tax liability.

#### 3. **Tax Compliance and Avoidance**

**Ideal Rules:**
- **Declare All Income:** Freelancers should declare all their income from freelancing and other sources in their tax returns. This includes payments received in multiple bank accounts.
- **Maintain Records:** Keep detailed records of all income, expenses, and receipts related to freelancing work.
- **Pay Taxes:** Pay taxes based on the declared income and applicable provisions of the Income Tax Act.

**Practical Scenario:**
- **Tax Evasion:** Some individuals might attempt to evade taxes by not declaring freelance income or not maintaining proper records. However, this is illegal and carries penalties.
- **Government Tracking:** The government can track freelance income through:
- **Bank Statements:** Banks report large transactions and high-value deposits to the Income Tax Department.
- **TDS and Other Information:** Employers deduct TDS on salary payments, and the Income Tax Department cross-checks this with the individual's tax returns.
- **Data Analysis:** The department uses data analytics to identify discrepancies in reported income and lifestyle.

**Summary:**
1. **Correct Application of Section 44AD:** If your gross receipts are under ₹60 lakhs and you meet other conditions, you can use Section 44AD and show 8% (or 6%) of receipts as income. You don't need to pay advance tax under this scheme.
2. **Advance Tax:** Even if you use Section 44AD, ensure to check if any advance tax needs to be paid based on your total tax liability.
3. **Compliance:** It’s essential to declare all your freelance income. The government has mechanisms to track undeclared income, and evading taxes can lead to legal consequences.

It’s advisable to consult a qualified tax professional to get personalized advice and ensure compliance with all tax laws and regulations.