Taxing Freelancing Income

Who is a freelancer?

Freelancer is a person who is self-employed, and have the freedom to choose their projects and companies they would like to be associated with. Some of the common profession for freelancing are: a writer who has the ability to submit their work to many different places, without being tied to any one company, a software developer, a photographer, an interior decorator, fashion designer, a blogger, a gym instructors etc. Freelancers don’t earn salary but run a business. The benefit that a freelancer gets while preparing tax details is that expenses of a freelancer are allowed to be deducted from freelancer’s income.

Income of Freelancer includes:

The sum of all the money one received against the work done is called gross receipt. If your receipts are received in a bank account, then sum them up from your bank account statement. If you have received some money as loan from relatives or friends than it does not count as your income. Payment received towards freelancing work is considered as income from freelancing. Income received from other sources such as interest on FD, rent from property are not included in the freelancing income. Such incomes are part of other heads of income in your return.

How is Freelancing Income calculated?

There are two methods to calculate the Income of the freelancer.

1.    Accrual Basis of Accounting- Here, the income is accounted when it’s due.

2.    Cash Basis of Accounting- Here, the Income is accounted only after it’s actually received.

How’s the Tax calculated on Freelance Income?

When it comes to the taxable Income in Freelance Income, here’s how it’s calculated:

[Net Taxable Income = Gross Taxable Income – Deductions]

You’re liable to pay tax if your age is less than 60 years and your total taxable income is more than 2,50,000.

Now, if the total Tax Liability exceeds Rs.10,000, the taxes are supposed to be paid every quarter.

Freelancing Expenses allowed as a deduction:

Freelancers can deduct expenses incurred exclusively towards the freelancing work. This could be anything from office rent, furniture or expense on visit to client. Personal expenditure of freelancer is not allowed as deduction. For example: If you are an app developer, you can deduct expenses on testing app and software purchase. If you have certain expenses like a cost of high speed internet connection that you use both for personal and professional purpose you can allocate a reasonable per cent to your freelancing work and deduct them.

Following are the Expenses allowed as a deduction:

·         Rent Expenses

·         Electricity Expenses/ Telephone Expenses/ Internet Expenses

·         Petrol/ Diesel Expenses

·         Travel Expenses relating to freelancing work

·         Local taxes and insurance of your business property

·         Meal, entertainment or hospitality expenses incurred on client

·         Depreciation on capital asset purchased for work (laptop, printers, car)

·         Office Expenses

·         Any other expenses incurred for the purpose of earning revenue

All payments in excess of Rs.20,000 must be made either by an account payee cheque or a demand draft. Keep a record of all your expenses and store all your expense receipts.

Deductions allowed under section 80C to 80U

Just like any salaried person, a freelancer can claim all the deductions listed under section 80, by fulfilling the conditions listed therein. For example if you have made an investments to PPF, NSCs or paid life insurance premium, you can avail deduction under section 80C.  In case of any medical premium paid by you, you can claim deduction under section 80D.

TDS for Freelancers

Government of India has made regulation by which an individual/company paying an individual or another company for services offered needs to deduct TDS. TDS in case of freelance should be deducted @ 10%. Individual/company from India having valid Tax Deduction Account Number(TAN) can only deduct TDS from your earnings. Unless your client has a TAN they are not eligible to deduct any TDS from your earnings. In many cases companies/individuals from outside India won’t have TAN, no TDS is applicable. In that case, depositing Advance Tax becomes freelancers’ liability. If any of your client have deducted TDS on payments made to you, you can take credit of this tax deducted from your final tax dues. If in a given financial year, your income does not exceed the basic exemption limit then deducted TDS from earnings can be claimed as refund from Income Tax Department. Since TDS was deducted at source without knowing how much your total income from the year would be, you can become eligible for refund in case the total TDS exceeds the amount of your tax liability.

What are the penalties for non-payment of advance tax?

Interest under Section 234B and Section 234C is applicable when you don’t pay your advance tax.

To avoid Interest Penalty under Section 234B and 234C –

Pay advance tax when your tax liability in a year is Rs. 10,000 or more

Advance tax payments done uptil 31st March of the year should be 100% or more of your total tax payable. Section 234B applies when Advance Tax has not been paid and since Advance Tax is payable as per dates set out by the IT Department, 234C is applicable when interest is not paid according to these due dates.

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