Under the Income Tax Act, any income earned by exhibiting your intellectual or manual abilities is income from a profession. This income would be taxed in the “Profits and gains from a business or profession” category.
There are two techniques for freelancers to account for their income and expenses and to assess their taxable income. They include accrual accounting and cash accounting. The accounting technique, if chosen once, must be followed continuously for years. You are not allowed to replace the technique frequently eg as a way to save taxes or avoid taxes.
Calculation of taxable income:
Calculation of the flat-rate tax: Freelancer’s income can be calculated on a presumptive basis u / s 44ADA provided their gross receipts are less than Rs. 50 lakhs. In that case:
Taxable income = 50% of gross revenue
If someone is covered by this section, they are not required to keep books of account and have them audited by CA.
Net taxable income from the income statement: If the freelancer’s gross receipts are over Rs. 50 per year or if he thinks his net profit is less than half of his gross receipts, then he can keep the books.
Taxable income = Gross revenue – Expenses incurred for the business
TDS deductions for the self-employed
Most clients deduct TDS from freelance fees. Freelancers can claim the TDS deducted when submitting the RTI (Income Tax Return). You can get the information about TDS inferred from Form 26AS. The total amount of TDS deducted during the year is available on the income tax portal under form 26AS.
For those occasions when the aggregate amount of tax payable is Rs 10,000 or more, the freelancer is expected to pay quarterly. This tax which is paid quarterly is an withholding tax.
First, all revenue is combined, expenses and TDS deducted, and income from other sources is added like home ownership income, interest income, capital gains etc. . Then, depending on the tax bracket to which they belong, the amount is calculated. If the tax amount is over Rs 10,000, you need to pay the tax advance on the due date.
When it comes to tax for freelancers, everyone must file an income tax return (ITR-3 or ITR-4). This is a tax return from the freelance writer. The ITR statement should include the details below:
- All sales and their sources
- Expenses incurred by sales
- The amount of overall tax paid, as well as withholding tax
- Depreciation on properties
- Investments declared as deduction
Points to keep in mind before submitting an ITR:
- List of gross receipts – Freelancers must accumulate all revenue from their freelance work completed during a fiscal year.
- Claim expenses – freelancers should keep in mind the statements below to claim expenses:
- Expenses are incurred for the performance of freelance work.
- The expense is incurred throughout the fiscal year, for example, in fiscal year 2020-21 for YY 2021-22.
- The nature of the expense is not personal, nor is it a capital expense.
- The expense is not incurred for any reason. It is an offense or prohibited by legal provisions.
- Expenses amounting to more than Rs 10,000 per day, if paid in cash, are not allowed as a deduction.
- No capital expenditure can be claimed as an expense. For example: buying a laptop, furniture, etc.
Applicability of the GST
Previously, VAT and service tax were the taxes that freelancers had to pay. However, the taxation process has now been replaced by the GST. GST is the tax applied to the goods or services you offer. Thus, freelancing also falls under the competence of the service. Therefore, 18% of the GST applies to most services.
Freelancers are responsible for CGST, SGST and IGST, depending on location. No GST exemption is available even if the business is online. Even if bloggers sell blog space in their state or across the state, they are still covered by GST rules. If the total amount of services exceeds Rs. 20 lakes per year, then they are likely to be registered under the GST Act. This limit is Rs. 10 lakhs in Uttarakhand, Jammu and Kashmir and Himachal Pradesh. At the same time, they can also claim an input tax credit on the goods and services they use for their business. This will reduce their liability for the GST.
Since freelancers work on different assignments and their income comes from national and international services, calculating the tax on their income can therefore be confusing and thought-provoking. In order to avoid any tax penalty and to benefit from maximum tax exemptions, the advice of an expert is always recommended.
(Ruchika Bhagat is Managing Director (MD) of Neeraj Bhagat & Co., an ISO 9001: 2008 UKAS certified organization, founded in 1997. Ruchika graduated in 1996, Fellow of the Institute of Chartered Accountants of India (ICAI) since 1998. She specializes in business advisory, tax, regulatory and risk. She is a strategic advisor in setting up businesses in India for foreign companies and ensuring compliance.)