Tax on Freelancers in India

a month ago   •   7 min read

By Zekeriya Mulbay

Freelancing helps avoid the monotony of a 9-5 job, balancing work and a freelancer’s interests and hobbies. It’s no wonder that freelancing as a career option is increasing in popularity in India. Though freelancers have considerable freedom in many senses, however, they are not exempted from government taxes.

So you may be asking, what is the nature of tax implications on freelancers in India, do I have to register somewhere as a freelancer? We shall get right to that.

What is Freelancing Income?

As stated, freelance income is also subject to tax. ****Freelancing and taxes can be hard to juggle, especially as there are many clients and possibly multiple sources of income for a freelancer to contend with.

The tax rates vary from Nil for an annual income of 2.5 lakhs and less to a maximum of 30% once the threshold of a yearly income of 15 lakhs is crossed.

The tax laws can be daunting at times, even for those seasoned at filing their taxes, much less for a freelancer who has little or no knowledge of the taxation rules and regulations. To handle the extra commitment that occurs while working on freelancing and taxes,  freelancers can turn to the numerous online portals that help the freelancer navigate the procedure for filing taxes in India.

It is vital to note that even those to offer their services on sites like Upwork and Fiverr have to pay income tax.

Pay income tax

When tax filing services are made use of, it will transfer the burden of tax compliance from the assessee to the tax preparer, who are usually experts in their field and will ensure that you are tax compliant with minimum effort from your side.

Further, as freelancers do not hold down a regular 9-5 job, filing returns will avoid facing the situation of how to provide proof of income as a freelancer.

Thus, utilizing a tax preparer's services will help you focus your attention on other important tasks while they take the responsibility of ensuring your tax compliance.


What is Freelancing Income?

The general definition of freelancing income refers to the income gained from work when you get hired to work on projects to be completed within a specific time frame. The freelancer gets paid upon its completion.

Freelancing Income

Hence you are not on the payroll of any firm and are free to accept or turn down any assignments based on your preferences.

The income earned from freelance activities is usually taxable under “Profits and Gains from Profession or Business.”


Taxes to be Paid by Freelancers

There are two kinds of taxes required to be paid by freelancers in India. One is the Tax Deducted at Source or TDS at a rate of 10% of every invoiced amount. This is applicable only if the amount billed is more than INR 30,000 in a single transaction or aggregated through the financial year.

The other tax you may have to pay is the GST or Goods and Service Tax. A freelancer will need to register under GST only if the annual turnover from freelance services crosses 20 lakhs. The tax rate for services provided under GST is 18%.

Taxes to be Paid by Freelancers

Freelancers can claim an input tax credit on GST paid on all expenses of an official nature. These include rent, phone bills, purchase of laptops or computers, etc.


Accounting Methods Used by Freelancers

The accounting methodology used by freelancers can be categorized broadly into two types. There is the accrual basis of accounting and the cash basis of accounting. The accrual methodology is also referred to as the mercantile basis of accounting.

In the accrual method, expenses and incomes are recorded when they are accounted for or when the incidence arises. Expenses are recorded as and when the invoice is raised.

Accounting Methods Used by Freelancers

Similarly, the income is recorded as and when the freelancer completes the assignment and hands over the invoice to the client. The tax liability rises as soon as the transaction occurs.

When the cash system of accounting is implemented, the expenses and income details are taken into the books only when the payment and receipts are processed. Tax liability arises in the financial year income is received. Till then, there is no compliance required.


Choosing the Right Accounting Method

The significant difference between the two accounting methods is that when following an accrual basis of accounting, the tax liability arises in the current financial year itself.

Whereas when you choose to follow the cash basis of accounting, the tax liability will occur only when you receive the payment for services rendered.

Right Accounting Method

Thus, the tax liability is shifted from the current financial year to the next financial year. Following the accrual system would be the logical approach unless your receipts are likely to be erratic or uncertain.


Expenses that can be Claimed as Deductions

Expenses of specific nature are permitted to be deducted against income and reduce the tax liability.

  • If the freelancer is working out of an office or co-working space, the expenses incurred therein can be offset against the income earned to calculate the tax liability.
  • Any costs incurred due to routine repairs, whether rented or owned, are also allowed to be deducted. Maintenance expenses of the assets used, such as computers, printers, and any other equipment used in the normal course of the business, are also allowed to be deducted.
Deductions
  • When a capital asset is purchased for work-related activity, a certain percentage of the asset’s purchase cost can be adjusted against the income every financial year. This deduction is known as depreciation.
  • Office expenses such as conveyance, and office supplies, including phone and internet bills, qualify as deductions when calculating the Income Tax payable.
  • Costs that are incurred to retain or to onboard new clients.
  • Payment of local taxes, if any, qualify for a deduction as well.
  • Any expenses arising from purchasing applications and websites for furthering the business can also be deducted from the income earned.

How Does a Freelancer File Taxes?

The answer to the question, how does a freelancer file taxes, is that ****there are two options for freelancers to use. They are the ITR-4 and ITR-3 forms. Freelancers can use ITR-4 when filing taxes under the Presumptive Taxation Scheme.

Freelancers who accumulate a gross receipt of 50 lakhs or less during the financial year are eligible for paying presumptive tax. A freelancer must enter 50% of their gross receipts to calculate tax liability under ITR-4.

How Does a Freelancer File Taxes?

Those who earn their income from freelance activities can also file their income under ITR-3. Activities such as web-designing come under the gambit of ITR-3 and are taxed under the head of Profits & Gains from Business or Profession. Any TDS amount deducted can be claimed to ascertain total tax liability.


Income Tax Slabs (Applicable from FY 20-21)

INCOME EARNEDTAX
Upto INR 2.5 LakhNil
INR 2.5 - 5 Lakh5%
INR 5 - 7.5 Lakh10%
INR 7.5 - 10 Lakh15%
INR 10 - 12.5 Lakh20%
INR 12.5 - 15 Lakh25%
INR 15 Lakh and Above30%

Conclusion

There has been a considerable uptick in the number of freelancers working in India. Though this has been partly due to the prevailing circumstances, there’s no denying the large volume of people choosing the freelance route to sustain themselves financially.

The reasons are many. Primary among them are the advantages of flexible hours, choosing your clients, less work pressure, and a healthy work-life balance.

Income Tax Slabs

That said, just like the salaried and the self-employed, freelancers too have a responsibility to file their taxes. Hopefully, this article has shed some light on the process of filing taxes in India as well as help analyze the process of how freelancers pay taxes, as it can be a cumbersome process for even those experienced in it.


FAQs

Being a freelancer, do I need to pay taxes and how do I pay takes?

Yes, even freelancers must pay taxes according to the tax structure that can be found on the Income Tax department website.

Can a freelancer choose any mode of accounting?

A freelancer can choose between the accrual or cash modes of accounting. It is essential to choose the mode of accounting carefully as once it has been chosen, it cannot be changed.

Are freelancers issued Form-16?

Form-16 will not be issued to freelancers as they are not employees of a firm. However, as they usually have multiple clients, Tax Deducted at Source, if any, will reflect in Form 26AS. The information gleaned from this form can be used for Income Tax computation.

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