Tax for freelancers in India is a dreaded topic, to say the least. Numbers, advance tax, deadlines, invoices, expenditure bills and to add to all the frustration, GST. The mere mention of the word ‘tax’ can leave freelancers stressed. However, if one tries to understand the nitty-gritty of taxes, it’s not as difficult.
Here’s a step-by-step guide on tax for freelancers in India:
What comprises income for freelancers?
All the money that a freelancer receives towards his/her freelancing work constitutes income. Whether the income is from a domestic or an international source, it doesn’t make a difference. The freelancers’ bank account statements are used to calculate the income generated.
What are the expenses for freelancers?
A lot of freelancers, especially the ones who are just starting out, do not know that they can show expenses that they incur when calculating the tax. Freelancers can show expenses that they incurred in carrying out work for particular assignments.
The expense should be directly related to carrying out the assignment. Thus, it is important that those expenses are incurred in the same financial year. The freelancers also should have physical valid proof. Freelancers cannot deduct any personal expenses.
Expenses that can be deducted
Only those expenses that are incurred in order to earn revenue through the freelance assignment can be shown as deductions. So what happens when the expense incurred is towards both, personal and freelance work, for example, house rent or phone bills?
In such cases, freelancers can only show a part of the amount as an expense and not the full amount. All the expenses shown have to have proof in order to be considered as deductions.
- Travel expenses for meetings or assignment related tasks
- Expenses of office supplies, stationery, phone, Internet, among others
- Cost of depreciation of assets such as a laptop, camera and other devices
- Rent on property that is used to carry out for the freelance assignment
- Co-working office space rent
- Repair expenses for the property
- Payment to freelance consultants for the assignment
- Lunch and hospitality expenses carried out for the assignment
How is the taxable income calculated?
Every individual in India has a taxable income bracket, as seen below.
Income (INR) Tax (%)
Up to Rs 2.5 lac Nil
Rs 2.5 – 5 lac 5%
Rs 5 – 10 lac 20%
Above Rs 10 lac 30%
The taxable income is simply calculated by deducting expenses from the gross taxable income: Total Income – Deductions = Total Taxable Income
Here’s an example:
Total annual revenue of a freelancer: Rs 10,00,000
Minus total expenses incurred: Rs 2,00,000
Minus depreciation on assets: Rs 1,00,000
Gross total income: Rs 7,00,000
Minus deductions allowed: Rs 1,00,000
Total taxable income: Rs 6,00,000
Freelancers can reduce the amount of tax they pay with the help of deductions under Section 80. 80G and 80C can provide tax rebate. Under 80G freelancers can get tax benefits towards donations made to charitable trusts, provided they have an 80G certificate to issue. 80C provides a tax rebate against certain expenses.
TDS deductions for freelancers
A number of clients deduct TDS from the payment to the freelancers. Freelancers can claim the deducted TDS when filing ITR (Income Tax Returns). Freelancers can get the information about TDS deducted from Form 26AS.
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How is the tax for freelancers paid?
In cases where the total tax payable amount is Rs 10,000 or more, the freelancer is expected to pay taxes every quarter. This tax paid every quarter is an advance tax.
How is advance tax calculated?
All receipts are added up; expenses for freelancing substracted, and income from other sources, added (house rent, interest on savings etc). Then, according to the tax slab that the individual freelancer belongs to, the tax amount is calculated. The TDS is to be deducted too. If the tax amount is more than Rs 10,000, the freelancer should pay the advance tax by the due date.
What is the due date for paying advance tax?
- On or before 15th June, 15% or more
- On or before 15th September, 45% or more depending on the amount of tax paid in the last instalment
- On or before 15th December, 75% or more depending on the amount of tax paid in the last instalment
- On or before 15th March, the entire 100%
The different ways of paying tax for freelancers
Freelancers can either do the process of tax calculation and tax payment by themselves on the Income Tax of India portal or take the services of a professional CA (Chartered Accountant).
Filing income tax returns
When it comes to tax for freelancers, every freelancer must file Income Tax Return (ITR). ITR is a statement of the freelancer’s taxes. The ITR statement has to include the below-mentioned details:
- All revenues earned and the sources
- Expenditure incurred for earning the revenue
- The amount of total tax paid, including advance tax
- Depreciation on assets
- Investments claimed as deductions
How can freelancer file tax returns?
Freelancers can file their income tax returns under the heading ‘Business and Profession’. The first step? Calculate the gross income of the financial year, which is from 1st April to the 31st of March. Loans taken for any purpose do not count as an income.
Next, deduct all the expenses incurred in order to carry out the freelancing work.
Freelancers are required to fill out and submit an income tax form – ITR-4.
Filing ITR can be a tedious and complex process for freelancers. Most freelancers take the help of professional CAs to manage their ITR.
Benefits of filing ITR for freelancers
- For availing home, vehicle or personal loans from banks
- Visa processing
- For carrying forward losses
- Buying a high life cover
- Freelancers do not get Form 16, hence filing ITR works as an important record
GST for freelancers
Earlier freelancers were required to pay VAT and service tax. This has now been replaced by GST (Goods and Services Tax). Freelancers whose revenue is 20 lac or more, need to register for GST. The freelancers whose revenue is less than 20 lac and those who provide services only within their state need not register for GST. The percentage of GST for a freelancer depends on the kind of service that the freelancer provides. If there is no rate specified then the freelancer is liable for 18% GST.
GST for goods: The rate of GST depends on the items that a freelancer sells.
GST for services: The GST amount on most services is 18%. Here’s how freelancers should bill their clients. If the amount towards the service is Rs 10,000, the freelancer should add 18% GST, Rs 1800 to the amount and bill the client for Rs 11,800. This Rs 1,800 GST has to be deposited with the government.
The three kinds of GST:
- IGST (Integrated Goods and Services Tax) has to be paid on the sale of goods or services between two states.
- CGST (Central Goods and Services Tax) is collected by the central government on the sale of goods and services.
- SGST (State Goods and Services Tax) is collected by the state government on the sale of goods and services.
How does invoicing work?
Freelancers should send a GST invoice when they bill clients for their services. Experts suggest using online accounting software to get the correct GST invoices for every job. Your invoice must include the following:
- Your name, address and GST number
- Invoice number and date of invoice
- Invoice due date if applicable
- Client’s name, address and GSTIN if applicable
- The value of the service and the tax rate applicable to it
The financial year-end is soon approaching. You have all the information that you need for taxes for freelancers in India. It’s time to get to work!
Want to get more organized about taxes, invoices and finances as a full-time freelancer? Read more from the HQ Digest.