Filing income tax for freelancers
Income Tax Filing for Freelancers: A Simple Guide
In this post, we will talk about how freelancers in India can file their income tax returns. Freelancing income is classified as company income under tax laws, meaning freelancers must follow specific rules for tax payments, GST, and deductions. This blog will help you understand the significant tax obligations, necessary ITR forms, and how to file your return correctly.
Let’s look at each section in detail:
- What is ‘Freelancing’ As Per Income Tax Rules?
- What is Freelancing Income?
- Applicability of Taxes and ITR filing For Freelancers
- GST Applicability for Freelancers
- Advance Tax Payment for Freelancers
- Some of the Applicable Exemptions/Deductions
- TDS for Freelancers in India
- Steps to File Income Tax for Freelancers
- FAQs
What is ‘Freelancing’ As Per Income Tax Rules?
According to income tax laws, income earned through manual or intellectual work is classified as “Profit and Gains from Business and Profession”. This means freelancers are treated as businesses for tax purposes and must file income tax returns.
Freelancers consist of various professionals such as bloggers, software developers, content writers, web designers, teachers, and fashion designers. The income from freelance jobs, regardless of the type, is taxable.
What is Freelancing Income?
Freelancing income is earned by working on specific projects or assignments on a contract basis. Unlike regular workers, freelancers are not part of the organization they work for and do not receive benefits such as the Provident Fund. They work individually, applying their skills to finish tasks within a specific time range.
Under Indian income tax laws, freelance income is classified as “Profits and Gains from Business or Profession.” Freelancers are treated as independent professionals or businesses, and their earnings are taxed.
Freelancers’ gross revenue consists of whatever they are paid for their work, such as project fees or hourly rates. Bank statements can help freelancers track their income and maintain detailed records.
Gross income is calculated for every financial year, beginning April 1 and ending March 31. However, any loans taken are not regarded as income.
Applicability of Taxes and ITR filing For Freelancers
Freelancing is a popular job choice in India since it provides flexibility and independence. However, freelancers must understand their tax duties under Income Tax and GST rules. Here’s a simplified guide to help you navigate the key tax rules:
1. Income Tax for Freelancers
Freelancers are taxed as businesses and must pay income tax on their total earnings for the entire financial year. Under Section 115BAC, they can choose between the Old Tax Regime and the New Tax Regime, which have different rates and benefits.
2. GST for Freelancers
Freelancers need to register for GST if their total income exceeds:
- ₹20 lakhs annually (₹10 lakhs for North Eastern and Hill states).
- The normal GST rate for most services is 18%, but this can vary depending on the type of service offered.
3. Presumptive Taxation Scheme (Section 44ADA)
- Only 50% of the income is taxed.
- It simplifies tax filing and lowers the tax burden.
4. Tax Audit Requirement
Freelancers earning more than ₹1 crore annually have to undergo a tax audit to ensure correct reporting and compliance with tax regulations.
5. TDS (Tax Deducted at Source) for Freelancers
- If a freelancer pays more than ₹30,000 to other professionals in a financial year, 10% TDS must be taken.
- This ensures accurate tax collection and reporting.
6. ITR Filing for Freelancers
- ITR-4 – For persons in the Presumptive Taxation Scheme.
- ITR-3 – For freelancers who don’t use the Presumptive Taxation Scheme.
GST Applicability for Freelancers
Before, freelancers had to pay VAT and service tax on their earnings. The GST has now replaced these:
If You Sell Goods
GST has replaced VAT for selling goods. The GST rate depends on the type of product. For example, if you bake and sell cakes to bakeries, you need to charge 18% GST, which is the current rate for cakes.
If You Provide Services
Most services are taxed at 18% GST. So, if you’re offering freelance services, you must add 18% GST to your invoice.
Example:
If you charge a client ₹75,000, the GST at 18% will be ₹13,500. The total invoice amount is ₹88,500, with a GST deposit of ₹13,500 to the government.
Advance Tax Payment for Freelancers
The advance tax requires taxpayers to pay a portion of their expected yearly tax in instalments during the financial year rather than all at once.
Freelancers must pay advance tax in four instalments on the following dates:
- 15th June
- 15th September
- 15th December
- 15th March
These payments help to spread the tax burden and avoid financial stress at the last minute. To avoid difficulties, freelancers must calculate their annual income and taxes accurately.
Penalties for Late Payment
Not paying advance tax on time can result in penalties and interest charges under Sections 234B and 234C of the Income Tax Act:
- Section 234B – Penalties will apply if the total tax liability exceeds ₹10,000 and advance tax is not paid.
- Section 234C – If advance tax is not paid on time, interest will be charged to ensure timely payments.
Some of the Applicable Exemptions/Deductions
Sections | Exemptions/Deductions |
Section 80C | Deduct up to ₹1.5 lakh for investments in ELSS, ULIPs, insurance, and fixed deposits. |
Section 80CCD | Deduction for investments in central government projects. |
Section 80CCF | Invest in government-approved infrastructure bonds and receive up to a ₹20,000 discount. |
Section 80D | Deduction for medical insurance premiums. |
Section 80DD | You can deduct up to ₹1.5 lakh for disability treatment expenses. |
Section 80E | Deduction for student loan interest. |
Section 80G | Deduction for contributions to charitable trusts and relief programs. |
TDS for Freelancers in India
Tax Deducted at Source (TDS) is a system under which the Indian government collects taxes directly from the source of income. Freelancers in India are subject to TDS under specific conditions.
Here are the important TDS sections for freelancers:
- Section 194J – It involves fees for professional and technical services, royalties, and non-compete costs. TDS rate: 10%
- Section 194H – This applies to commission or brokerage. TDS rate: 5%
- Section 194C – This applies to all contract payments for any work. TDS rate: 1% for persons and HUFs; 2% for others.
Steps to File Income Tax for Freelancers
- Select the Right ITR Form:
- ITR-3 – Individuals and HUFs with business or professional income.
- ITR-4 (Sugam) – Section 44ADA applies to individuals, HUFs, and companies (except LLPs) under the presumptive income plan.
- Collect Necessary Documents:
Keep the following documents ready:
- Bank statements
- Form 16A
- Books of accounts
- Invoices
- Investment proofs
- GST returns
- Calculate Total Income: Add up your earnings from freelancing and other sources.
- Apply Presumptive Taxation (if eligible): If your total income is up to ₹50 lakh, you can adopt the presumptive taxation scheme under Section 44ADA.
- Register on the Income Tax e-Filing Portal: Please create an account if you haven’t done so.
- Log in and Select the ITR Form: Select the correct form based on your income type.
- Upload and Submit the Form: After completing the form, upload and submit it.
- Verify Your ITR: Finish the procedure by confirming your return online.
So, that brings us to the end of this post. Please use the space below to ask any questions or leave comments; we will gladly respond.
FAQs
1. Can individuals with a fixed wage who do freelance work in their spare time benefit from the Presumptive Taxation Scheme?
Ans: Yes, both salary and freelancing income are liable to income taxes. Salary income is calculated in a standard manner, but the Presumptive Taxation Scheme only applies to freelancing income.
2. Do freelancers file ITR 3 or 4?
Ans: Freelancers can file either ITR-3 or ITR-4, based on their income and if they chose the presumptive taxation plan.
3. What is the procedure for calculating aggregate turnover for GST registration?
Ans: According to GST regulations, aggregate turnover is calculated by adding the taxable sales value, exempt sales value, exports of goods and services, and interstate supply made by the business.
4. Which ITR form is appropriate for the presumptive scheme of taxation?
Ans: Taxpayers who choose presumptive taxation under sections 44AD, 44ADA, and 44AE can file their returns in the ITR-4 form (Sugam).
