Can Freelancers Use ITR-1? No, and Here’s Why
- PRITI SIRDESHMUKH
- Jul 17
- 8 min read
Filing Income Tax Returns (ITR) is a crucial process for all taxpayers, and it becomes especially important for freelancers. However, many freelancers struggle with determining the right form to use for filing their taxes, particularly when they are uncertain about whether they should use ITR-1. While ITR-1 is commonly used by salaried individuals and others with simple tax structures, freelancers face unique challenges that prevent them from using this form. Let's explore why freelancers cannot use ITR-1 for their tax filings, helping them better understand their obligations and make the correct choices when it comes to filing their returns.
Table of Contents
Why Freelancers Cannot Use ITR-1
ITR-1, also known as the Sahaj Form, is designed for individuals who have a relatively simple tax situation. This includes those who earn income from salary, pension, or other sources such as interest or rental income. The key reason freelancers cannot use ITR-1 is that this form is not suited for individuals who have income from a profession or business.
Freelancers often earn income from sources such as consulting, writing, design, or other self-employed activities. Income from freelance work is considered business or professional income, and the ITR-1 form does not accommodate this type of income. The income of freelancers is categorized under Section 44ADA (presumptive taxation scheme for professionals) or Section 44AA (regular business), which requires a different set of forms that can accommodate the complexities of freelance income.
Freelancers also need to account for expenses incurred during their work, such as office supplies, internet charges, or software tools, which ITR-1 cannot capture. Therefore, a more suitable form for freelancers is ITR-3, which is designed for individuals and HUFs (Hindu Undivided Families) having income from business or profession, including freelance activities. This form allows freelancers to report income and claim relevant expenses, providing a more accurate representation of their financial situation.
Eligibility Criteria for ITR-1
ITR-1 is available for individuals who meet the following eligibility criteria:
Income from Salary or Pension: Only individuals earning income from salary, pensions, or one house property are eligible.
Other Income: The form is designed for individuals with income from other sources like interest, dividends, or a few other minor sources of income.
Total Income: The total income must not exceed ₹50 lakhs in the financial year.
No Business or Professional Income: ITR-1 is strictly for those without business or professional income, as it doesn’t include sections for reporting business profits and losses.
Since freelancers typically earn professional income, they must choose another form, such as ITR-3, which allows them to report business income, claim deductions for expenses, and file the necessary documentation required for professional earnings.
Correct Forms for Freelancers
Freelancers who earn income through their profession, such as consulting, content creation, graphic design, or writing, should use ITR-3 to file their taxes. ITR-3 is designed for individuals who earn income through business or profession, including freelancers.
ITR-3 allows freelancers to report their income from their professional services, claim expenses related to their work, and accurately calculate their tax liabilities. The form includes sections for:
Income from Business or Profession: Freelancers can report their business income here, detailing any expenses related to their profession, such as office rent, software, or travel expenses.
Other Sources of Income: If a freelancer has income from other sources like interest, dividends, or rental income, they can report it in the relevant section of the form.
Tax Deductions: Freelancers can claim deductions under sections like 80C (life insurance, PPF, etc.) and 80D (health insurance), which are applicable to them.
Audit Requirements: If a freelancer’s income exceeds ₹2.5 lakh, they may be required to get their books audited and provide additional documentation.
It’s important for freelancers to choose the correct form to ensure that they meet their tax obligations and avoid penalties.
Recent News and Updates
For FY 2024-25 (Assessment Year 2025-26), there have been updates to the ITR forms and the tax filing process that could impact freelancers. The tax filing system has seen the introduction of enhanced functionalities for e-filing, with a greater focus on digitization. Here are some notable updates:
New ITR Forms: The forms have been redesigned to accommodate more comprehensive reporting, including detailed sections for business income and professional services.
TDS Credits and Compliance: Freelancers may find it easier to claim TDS credits directly through the ITR-3 form. Ensuring accurate reflection of TDS credits has become a key focus for the current tax year, as any discrepancies can delay refunds.
Tax Regime Options: Freelancers can now choose between the old tax regime with deductions and exemptions or the new tax regime, which offers lower tax rates but fewer deductions.
These updates are designed to make the filing process smoother and ensure that freelancers can file accurately, benefiting from available deductions and minimizing the risk of audits.
Specific Questions Answered
Can Freelancers Use ITR-2? Freelancers cannot use ITR-2 either, as it is meant for individuals who have income from sources other than business or profession, such as capital gains or income from foreign assets. Freelancers should use ITR-3, as it specifically covers income from business or professional services.
What Kind of Income Can Freelancers Report in ITR-3? Freelancers can report income from their freelance work under business or professional income. They can choose between the regular method of accounting and the presumptive taxation scheme under Section 44ADA, which simplifies the process by allowing a fixed percentage of income as expenses.
What Tax Deductions Can Freelancers Claim? Freelancers can claim deductions under sections like 80C (for investments in PPF, LIC, etc.), 80D (for health insurance premiums), and 80G (for charitable donations). They can also claim business-related expenses such as office rent, travel, and professional fees, which ITR-3 allows them to report.
Can Freelancers File Under the Presumptive Taxation Scheme? Yes, freelancers who meet the criteria for the presumptive taxation scheme under Section 44ADA can file their returns under this scheme. This allows them to declare 50% of their total gross receipts as income and pay taxes on that amount, simplifying the tax calculation process.
Conclusion
Understanding the correct ITR form to use is essential for freelancers to ensure compliance and avoid penalties. Since freelancers typically earn business or professional income, ITR-1 is not applicable to them, as it does not accommodate this type of income. Instead, freelancers should use ITR-3, which is designed to handle income from business and profession, allowing them to accurately report their earnings and claim deductions for relevant expenses. By selecting the correct form and following the filing process, freelancers can ensure a smooth and compliant tax filing experience. For anyone looking for assistance in filing their returns, it is highly recommended to download theTaxBuddy mobile app for a simplified, secure, and hassle-free experience.
FAQs
Q1: Can I file my ITR-1 if I earn freelance income under ₹2.5 lakh?
No, you cannot file ITR-1 if you are earning freelance income, even if it is under ₹2.5 lakh. ITR-1 is designed for salaried individuals with income from salary, pension, or other sources like interest, and does not accommodate business or professional income. As a freelancer, your income is classified under business or professional income, which requires filing ITR-3. In ITR-3, you can report freelance earnings, business expenses, and claim deductions related to your profession.
Q2: What are the key differences between ITR-1 and ITR-3?
ITR-1 is meant for individuals with income only from salary, pension, or other non-business sources. It is simpler and easier for individuals with straightforward income streams. On the other hand, ITR-3 is designed for individuals who have income from business or profession, such as freelancers, self-employed professionals, or business owners. ITR-3 requires detailed reporting of business income, expenses, and deductions, which is not needed in ITR-1. It also allows freelancers to report and claim business-related expenses.
Q3: Can I claim business expenses as a freelancer while filing ITR-3?
Yes, freelancers can claim a wide range of business-related expenses while filing ITR-3. These may include expenses like office rent, utilities, professional services, equipment costs, travel, internet bills, and software subscriptions. These deductions help reduce your taxable income and, therefore, the amount of tax you need to pay. It’s important to maintain proper documentation such as invoices, receipts, and bank statements to substantiate your claims for these expenses.
Q4: Do I need to provide proof of my freelance income and expenses when filing ITR-3?
Yes, you should maintain and provide supporting documentation for both your freelance income and expenses when filing ITR-3. This includes invoices, receipts, bank statements, and contracts that prove the income you earned from freelancing. Additionally, receipts for business-related expenses such as software subscriptions, office rent, or equipment costs should be maintained to substantiate your claims for tax deductions.
Q5: Can I choose the presumptive taxation scheme under Section 44ADA as a freelancer?
Yes, if your gross receipts from freelancing are less than ₹50 lakh and you fulfill other specified conditions, you can opt for the presumptive taxation scheme under Section 44ADA. This scheme allows you to declare 50% of your gross receipts as income, and pay taxes accordingly, without the need for detailed bookkeeping. This simplifies the process of filing your return and ensures ease of compliance, as you are not required to maintain detailed accounts for your business.
Q6: Do I need to file an audit report if I use Section 44ADA for freelancing income?
No, if you are opting for the presumptive taxation scheme under Section 44ADA, you do not need to get your accounts audited, provided your total gross receipts do not exceed ₹50 lakh. This reduces the compliance burden significantly, as you are allowed to declare 50% of your receipts as income, and no additional documents are required to substantiate your income or expenses.
Q7: What if my freelance income exceeds ₹50 lakh?
If your freelance income exceeds ₹50 lakh, you are no longer eligible for the presumptive taxation scheme under Section 44ADA. In this case, you will need to file a regular ITR-3 return, where you will be required to maintain detailed records of your income and expenses. Additionally, you may need to get your accounts audited by a qualified Chartered Accountant if your turnover exceeds the prescribed limits under Section 44AB.
Q8: Can I claim deductions for my home office as a freelancer?
Yes, as a freelancer, you can claim deductions for your home office under business expenses when filing ITR-3. To qualify for this, the home office must be used exclusively for business purposes, and you must maintain proper documentation for expenses such as rent, utilities, repairs, and a portion of your home’s maintenance costs. These deductions can reduce your taxable income, helping you save on taxes.
Q9: How do I file ITR-3 if I am using the presumptive taxation scheme?
When filing ITR-3 under the presumptive taxation scheme, the process is quite simple. You just need to declare 50% of your gross receipts as income, which will be considered as your taxable income. There is no need to maintain detailed books of accounts or provide detailed expense reports. This significantly reduces the filing complexity, making the process quicker and easier.
Q10: Can I file ITR-3 if I have both freelance and salaried income?
Yes, you can file ITR-3 if you have both freelance and salaried income. In this case, you will need to report both sources of income in the appropriate sections of the ITR-3 form. You will report your salary income under the "Income from Salary" section, and your freelance income as "Income from Business or Profession." This ensures that both income streams are reported correctly, and any deductions related to freelance work can be claimed under business expenses.
Q11: What happens if I file the wrong ITR form as a freelancer?
If you file the wrong form, such as ITR-1 instead of ITR-3, your return will be considered invalid, and you may be required to file a revised return with the correct form. This can lead to delays in processing your return and could also result in penalties if the incorrect filing is discovered. It’s essential to ensure you use the correct form based on your income type, such as ITR-3 for freelancers.
Q12: Can I file my return manually or do I need to file it online as a freelancer?
As a freelancer, it is recommended to file your return online for convenience and faster processing. The Income Tax Department’s e-filing portal provides an easy-to-use interface that allows you to file ITR-3 online. Filing online ensures that your return is processed quickly, and you can track the status of your return in real-time. Additionally, online filing allows you to use platforms like TaxBuddy, which offer automated assistance, making the entire process simpler and error-free.
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