Yes, freelancers do pay taxes for their income just like any other businessperson or salaried professional under the Income Tax Act. Any earning earned through exhibiting intellectual or manual capabilities is earnings from the profession that is taxed under the “Profits and Gains from Business or Profession" category.
There are two techniques to account for the earnings and expenses of freelancers to calculate the taxable income –
Whichever technique is chosen, it must be followed continuously for some years. Freelancers are not given the option to change the taxing technique to save or avoid taxes.
Calculating freelance income
The bank account statements are adequate for calculating freelance income. Every amount received from clients must be added to determine how much income one has earned and advance tax should be paid in the final month of every quarter. The advance tax can be calculated by adding all the amounts on every invoice received from the start of the financial year. Expected future payments must also be added to this amount, along with any investments made, and any business expenses must be deducted from the total amount.
Computing taxable income
When a freelancer's gross earnings are less than Rs. 50 lakhs, their income is calculated on a presumptive basis under section 44ADA. Here, Taxable income = 50% of gross receipts. Freelancers covered under this section are not required to maintain Books of Accounts.
If the freelancer’s gross receipts are more than Rs. 50 lakhs per annum, and if they think their net profit is less than half of their gross receipts, then they can maintain books of accounts. Here, Taxable Income = Gross Receipts – Expenses incurred for Business, TDS Deductions and Advanced taxes.
Clients mostly deduct TDS from the freelancer’s fee, and the freelancer can mention this at the time of submitting income tax returns (ITR). TDS-related information for the year can be obtained from Form 26AS available on the Income tax Portal.
If the overall tax payable amount is Rs. 10,000 or more, the freelancer must pay advance taxes every quarter. For this, all the receipts are combined, expenses and TDS are deducted, and earnings from other sources such as income from property, interest, capital gains, etc. are added. Thereafter, as per the tax slab, the taxable amount is calculated. If the income tax amount is greater than Rs. 10,000, then advance tax must be paid.
Deadlines for Advance Tax payment are -
Freelancers must file ITR-3 or ITR-4 and cover the following details –
While submitting the ITR, list the gross receipts from the freelance work completed in that financial year. Freelancers can claim expenses that are –
*Note – capital expenses such as the purchase of a laptop or furniture cannot be claimed as expenses.
CGST, SGST, and IGST are enforced on products or services offered by freelancers depending upon the place of service. There is no GST exemption on online businesses. If the freelancer is selling their products or services within their state or any other state, they are covered under GST rules.
If the total amount earned by a freelancer exceeds Rs. 20 lakhs per annum, they are liable to be registered under GST Act. In Uttarakhand, Himachal Pradesh, and Jammu & Kashmir, this limit is Rs. 10 lakhs. Goods & Services taxes can be inputted from domestic as well as international services. to avoid tax penalties, the safe way is to avail of maximum tax exemptions.
Income tax for income from local and overseas clients
India-based clients subtract TDS from the amount they pay a freelancer. This credit is taken against overall tax liability and if excess TDS is deducted, then a refund can be claimed for the same. If there are additional dues to be paid, these can be cleared once the returns have been filed. Generally, 10% TDS is deducted for freelancers.
The Indian freelancers who earn income for overseas clients and receive money via direct credit to their bank account, or via payment gateways such as RazorPay and PayPal, usually receive the amount without TDS deductions. In some countries, laws mandate that tax be deducted at the source. In such cases, the freelancer will be allowed to take credit for such payments.
Under the Double Tax Avoidance Agreement (DTAA) which is a contract India has with numerous countries, a freelancer cannot be taxed twice. In case TDS isn’t deducted, the receipts will have to be included in the overall income and the applicable tax rates have to be paid for the same.
Tax savings as a freelance
Primarily, freelancers can save taxes by making claims on business expenses such as phone bills, travel expenses, conveyance, and all expenses claimed by salaried professionals under Section 80 of the Income Tax Act.
All the bills must be furnished as proof of the deduction. Deductions can be claimed on investments under Section 80C for buying LIC policy, PPF investment, or any tax-saving mutual fund scheme, to name a few. The maximum amount of deduction is limited to Rs. 1.5 lakhs. Under Section 80D, health insurance premiums can be claimed as deductions and under Section 80G donations can be claimed as deductions.