Income tax on Freelancer

Freelancing is a particular assignment done by an individual of a company. You may call it a self-employed person who works either individually or hires a few more people to work with him on a particular assignment. Freelancing is a commercial term, but under the income tax act, there is no term like freelancer and freelancing.

In this article for the sake of the reader, we will try to cover a few important limbs of the income tax act that applies to freelancer, and he/she should remember when they make a transaction.

Under which head income of freelancer is chargeable to tax?

In freelancing work, individuals are not an employee of any company. They are self-employed hence they don’t get any perks/perquisites from the company for which are working. They are not eligible for the perks like other employees are getting who are on the payroll of the company. In India, we can see that so many freelancers are working independently. They work get assignments from either individuals or companies and after completing the assignment they get paid.

Freelancing is a self-employed work and self-employed are liable to file their income tax return under the head ‘’Income from Business and Profession”. Income tax has 5 heads under which return of income is filed and tax is determined. These heads as set out below-

  1. Income from Salary
  2. Income from House property
  3. Income from Business and profession
  4. Income from Capital gain
  5. Income from other sources

Freelancer should make sure that they are filing income tax return under the head ‘’Income from business and Profession’’

Which expenses are allowed as deductions from income?

The income tax act allows freelancers to deduct expenses from the income they earn. Only the expenses are allowed as deductions which are incurred wholly and exclusively for the purpose of the assignment undertaken. It has been seen that freelancers are not known of the expenses incurred because of their nature and materiality

Here is the list of common expenses incurred but less known by the freelancer. These expenses are:

  1. Internet expenses
  2. Depreciation of laptops, Furniture and Fixtures
  3. Electricity expenses
  4. Repair and maintenance of Laptop and Furniture
  5. Office maintenance (if any setup is created in the house)
  6. Conveyance expenses
  7. Rent of property
  8. Office expenses
  9. Website expenses such as domain charges, hosting charges, SEO charges, etc.
  10. Expenses incurred to get the assignment. There are a few websites like Freelancer and Upwork that allow you to get the work on payment of charges. These charges are allowed as deductions.

It is important to note that those expenses are of personal and capital nature are not allowed as a deduction for the income of assignment. Only the revenue expenses are to be deductible.

For Example, Rakesh is a freelance. He has an assignment for a company situated in Gurgaon. He received an assignment fee of Rs. 3 lakhs from the company. He incurred the expenses on rent-15000, Internet-2000, Office- 65000, Depreciation-38000.

He hires an income tax consultant in Gurgaon and takes assistance in filing ITR and the income tax consultant calculates and declares the following income in the ITR=

Assignment fee –                    3,00,000

Less:  Rent expense –             15,000

            Internet expense-         2,000

            Office Expense –          65,000

            Depreciation   –            38,000

Income from freelancing=  1,80,000

Should freelancers maintain books of accounts?

Section 44AA of the income tax act requires the freelance to maintain books of account. The requirement to maintain books can be understood with the chart set out below:

Specified ProfessionGross receipt < Rs.1,50,000 in any of the three years immediately preceding the previous year.A person coming under this category is required to maintain books of accounts, however, books of account have not been prescribed for this category of person
Specified ProfessionGross receipt > Rs.1,50,000 in any of the three years immediately preceding the previous year.A person covered under this category is to maintain books as prescribed by rule 6F
Non-Specified Profession and businessWhose income from business and profession< 120000   or   Total sale, turnover, gross receipt <10,00,000 in all immediately preceding 3 yearsBooks of accounts are not required to be maintained
Non-Specified Profession and businessWhose income from business and profession> 120000   or   Total sale, turnover, gross receipt >10,00,000 in all immediately preceding 3 yearsBooks of accounts are required to be maintained

To understand the requirement to maintain books of accounts you can go to the link https://www.nbaoffice.com/maintenance-of-books-of-accounts-under-the-income-tax-act/ for further analysis.

Should freelancers pay advance tax?

The requirement to pay advance tax arises when the estimated income tax liability is Rs 10,000 or more in a financial year.

Senior citizen (i.e., resident induvial of the age of 60 years or more at any time during the financial year) is exempt from payment of advance tax not having income from Business/Profession.

The due date for payment of advance tax:

The due date for payment of advance taxAll Taxpayers (other than person declaring income u/s 44AD and 44ADA)
On or before June 15Up to 15% of advance tax payable
On or before September 15Up to 45% of advance tax payable
On or before December 15Up to 75% of advance tax payable
On or before March 15Up to 100% of advance tax payable

From the assessment year, 2017-18 freelance opting for presumptive tax scheme under sections 44AD and 44ADA is liable to pay 100% advance tax on or before 15th March of the relevant previous year.

About the author: Nitin Bhatia is a qualified chartered accountant practising in Delhi/NCR. He is the best CA in Gurgaon. During his professional journey, he has gained advanced experience in International Taxation, Transfer Pricing, Expatriate Taxation, Corporate Taxation, Domestic Taxation and litigation matters. International Taxation and Domestic taxation are his study topic, and he is deeply involved and updated with the recent judicial pronouncements. It helps him to give efficient and legitimate tax planning to his clients.

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