Filing ITR for Freelancers: ITR 3 vs ITR 4 with Real-life Scenarios

Filing income tax returns (ITR) as a freelancer in India can be a bit tricky, especially when it comes to selecting the correct form—ITR-3 or ITR-4. Freelancers typically have unique income sources, such as freelance payments, consulting fees, or earnings from digital platforms. Therefore, understanding the key differences between ITR-3 and ITR-4 is crucial to ensure compliance with the Income Tax Act, 1961. By choosing the correct form, freelancers can avoid penalties and make the filing process more streamlined. The decision ultimately depends on whether the freelancer is maintaining books of account or opting for the more simplified presumptive taxation scheme. Let us understand a detailed comparison between ITR-3 and ITR-4, explain how to file them, and cover various tax aspects specific to freelancers. Real-life scenarios will help illustrate the filing process and key considerations for each form.

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Table of Contents

• Key Differences Between ITR-3 and ITR-4

• Real-Life Scenarios for Freelancers

• Step-by-Step Filing Process

• Tax Deductions and TDS

• Conclusion

• FAQs

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Key Differences Between ITR-3 and ITR-4

The primary difference between ITR-3 and ITR-4 lies in the type of income the taxpayer earns and the tax scheme they opt for. Here’s a detailed breakdown:

Aspect	ITR-3	ITR-4
Applicability	For freelancers/businesses maintaining books of account. This form is for those who have income from profession, business, or other sources and require to maintain books.	For those opting for presumptive taxation under Sections 44AD, 44ADA, or 44AE. It simplifies the filing process by assuming a set income percentage.
Income Limit	No upper limit. Freelancers or businesses who don’t qualify for presumptive taxation will file ITR-3 regardless of their income level.	Up to ₹50 lakh (₹75 lakh if digital receipts are involved). This income limit applies for freelancers availing of presumptive taxation schemes under Section 44ADA.
Audit Requirement	Mandatory if the turnover exceeds ₹1 crore (unless opting for a lower limit under Section 44AD).	No audit required, making it a simpler option for freelancers under the presumptive taxation scheme.
House Property Income	Supports multiple house properties. If a freelancer has rental income from more than one property, they should file ITR-3.	Only one house property allowed for declaring rental income. This limit could be a constraint for some freelancers.
Due Date	July 31 (for non-audit cases) / October 31 (for audit cases). Freelancers who need to maintain books must comply with these deadlines.	July 31. This is a simpler due date since no audit is required for ITR-4 filers.

Further Explanation:

• ITR-3: This form is for freelancers who maintain their books of account and whose income is higher than the ₹50 lakh limit, or who earn from multiple sources of income. They have to report their income after deducting business expenses, thus providing a detailed account of their earnings.
  

• ITR-4: Ideal for freelancers opting for the presumptive taxation scheme under Section 44ADA, where they declare 50% of their gross receipts as income without the need to report every single expense. This makes it a simpler filing option but is limited by the ₹50 lakh income cap (₹75 lakh for digital receipts).

Real-Life Scenarios for Freelancers

Understanding the theoretical differences between ITR-3 and ITR-4 is important, but applying these concepts to real-life examples can make things clearer. Here’s a detailed breakdown of how different freelancers would approach their tax filings depending on their income structure.

Case 1: Freelancer With Digital Receipts

Scenario: Priya is a content writer who works for various freelancing platforms and digital agencies, earning a total of ₹70 lakh in the financial year 2024–25. All her payments are through online platforms, which makes her eligible for presumptive taxation under Section 44ADA of the Income Tax Act. Solution: Since Priya’s income comes entirely from digital platforms, she can opt for ITR-4 under the presumptive taxation scheme. Under this scheme, she is required to declare 50% of her total income as taxable income. Therefore, Priya will report ₹35 lakh as her taxable income, with the remaining ₹35 lakh assumed to be her expenses. This simplified method removes the need for her to maintain detailed records of her expenses, significantly reducing the administrative burden involved in filing taxes. The presumptive taxation system is especially useful for freelancers like Priya, as it saves time and minimizes paperwork.

Case 2: Multi-Source Income Freelancer

Scenario: Raj is a graphic designer who earns ₹45 lakh from his freelancing work and ₹5 lakh from rental income. Since Raj’s income includes rental income, he is not eligible for presumptive taxation under Section 44ADA, which means he cannot file ITR-4. Solution: Raj will need to file ITR-3, which allows him to report multiple income sources. He will report ₹45 lakh as freelance income and ₹5 lakh as income from property. Under ITR-3, Raj must maintain detailed books of account, which means he must track his income and expenses carefully for each source. This form requires freelancers to account for every income stream and deduct any eligible expenses. While it’s more cumbersome than ITR-4, it is the appropriate choice for freelancers like Raj who have varied income sources.

Case 3: Freelancer Exceeding Presumptive Limit

Scenario: Ankit is a business consultant whose earnings total ₹55 lakh in FY 2024–25. Since his income exceeds the ₹50 lakh limit set for presumptive taxation under Section 44ADA, Ankit cannot file ITR-4 and must file ITR-3. Solution: Ankit will file ITR-3, as his income is above the limit for presumptive taxation. He will need to maintain detailed books of account, track his income, and report all expenses incurred in generating his business income. This filing process will require more effort, as Ankit needs to ensure that his financial records are accurate and up-to-date. ITR-3 also allows him to claim deductions for his business expenses, making it more suitable for individuals whose income exceeds the presumptive taxation limits.

Step-by-Step Filing Process

Filing your ITR might feel overwhelming at first, but breaking down the process into simple steps can make it manageable. Below is a detailed guide on how to file your ITR efficiently, ensuring that you meet all the necessary requirements and deadlines.

Choose the Correct Form

• If you are eligible for presumptive taxation under Section 44ADA: You should opt for ITR-4. This form is ideal for freelancers who meet the conditions for presumptive taxation and have a gross receipt of up to ₹50 lakh (₹75 lakh if their income is from digital platforms).
  

• If your income exceeds the presumptive limit or includes multiple sources of income: You should file ITR-3. This form is applicable when you have complex income sources, such as income from multiple freelance projects, rental income, or capital gains. ITR-3 requires you to report detailed information about your income and expenses.
  

• Make sure to carefully assess your income and tax situation before making a decision: If you're unsure, it’s always helpful to consult a tax professional or use a tool like TaxBuddy to help you determine the correct form.

Calculate Income

• For ITR-4: Under Section 44ADA, you need to declare 50% of your gross receipts as taxable income. The rest of the income is considered to be your expenses. This simplified calculation eliminates the need to track each individual expense, which makes it less time-consuming for freelancers. For example, if your gross receipts are ₹60 lakh, you will declare ₹30 lakh as taxable income.
  

• For ITR-3: If you’re filing ITR-3, you will need to calculate your actual income by deducting your business expenses from your gross income. This means you will need to maintain a detailed record of all expenses related to your freelancing business. These expenses might include software tools, travel expenses, office supplies, and more. The advantage of ITR-3 is that it allows you to deduct actual expenses, which could reduce your taxable income. For instance, if your income is ₹70 lakh and your deductible expenses are ₹20 lakh, you will report ₹50 lakh as taxable income.

File via Portal

• Go to the official Income Tax e-filing portal: Once you’ve selected the correct form and calculated your income, you can visit the Income Tax e-filing portal to file your returns.
  

• Upload the correct form: After filling in all necessary details, ensure that you upload the correct form (ITR-3 or ITR-4) on the portal.
  

• Ensure accuracy before submitting: Double-check all the details you’ve entered, including income, expenses, tax paid, and TDS, to ensure that everything is accurate. Any discrepancies could delay the filing process or result in penalties.
  

• Maintaining books of account: If you’re filing ITR-3, ensure your books of account are in order and provide adequate support for the income and expenses reported.

Tax Deductions and TDS

Freelancers can claim various deductions that will reduce their taxable income, thereby reducing their overall tax liability. Here’s a breakdown of some important tax-saving options:

Deductions:

• Section 80C: Freelancers can claim deductions of up to ₹1.5 lakh for investments in tax-saving instruments like the Public Provident Fund (PPF), Employees’ Provident Fund (EPF), National Pension Scheme (NPS), and more. These deductions help reduce your taxable income, especially if you’re actively saving for retirement or other future needs.
  

• Section 80D: Health insurance premiums are eligible for deductions under Section 80D. Freelancers who pay for their own health insurance or their family’s health insurance can claim deductions under this section. These deductions are particularly useful for freelancers looking to reduce medical expenses while ensuring they are covered for unforeseen health-related costs.
  

• Section 80G: Donations made to charitable organizations that are registered under Section 80G are eligible for deductions. This not only helps you save on taxes but also contributes to causes that align with your values. Freelancers can claim tax benefits for charitable contributions that are made during the financial year.

TDS Compliance:

• TDS for freelancers: If a freelancer receives payments over ₹30,000 from any contractor, a 10% Tax Deducted at Source (TDS) is applicable. Freelancers must ensure that TDS is deducted at the source, which is typically handled by the payer.
  

• Reconcile with Form 26AS: It’s crucial to check your Form 26AS to ensure that the TDS deducted is correctly credited to your account. Form 26AS is an annual tax statement that contains details of taxes paid on your behalf, including TDS. If the TDS amount shown on your Form 26AS does not match what was actually deducted, you may need to contact the payer for correction.

Conclusion

Choosing the correct form between ITR-3 and ITR-4 is crucial for freelancers to ensure they are complying with tax laws while minimizing unnecessary complexities. ITR-4 is ideal for freelancers opting for presumptive taxation, whereas ITR-3 is suited for those with more complicated income sources. Tools like TaxBuddy’s mobile app simplify this process by selecting the correct form, pre-filling your details, and offering a secure filing experience. For anyone looking for assistance in tax filing, it is highly recommended to download the TaxBuddy mobile app for a simplified, secure, and hassle-free experience.

Frequently asked Question (FAQs)

1. Does TaxBuddy offer both self-filing and expert-assisted plans for ITR filing, or only expert-assisted options? Yes, TaxBuddy provides both self-filing and expert-assisted plans. This flexibility ensures that freelancers have options based on their level of expertise and the complexity of their tax filings. Freelancers who prefer a hands-on approach can opt for the self-filing plan, where they can fill in the details themselves while receiving guidance from the platform. On the other hand, those who prefer expert help or have complex financial scenarios can choose the expert-assisted plan, where TaxBuddy’s experienced professionals will guide them through the entire filing process, ensuring accuracy and compliance with all tax regulations.

   
   

2. Which is the best site to file ITR? TaxBuddy stands out as an excellent platform for filing ITR. It offers a seamless and user-friendly experience, making it easy for freelancers to file their tax returns without hassle. The platform provides pre-filling options, error checks, and AI-driven tools that automate much of the process, ensuring accuracy and reducing the chances of mistakes. With its simplified interface, TaxBuddy ensures that freelancers can file their ITR quickly and confidently. Additionally, the platform offers a high level of security, making it a trusted option for freelancers looking to comply with tax laws.

   
   

3. Where to file an income tax return? Income tax returns (ITR) can be filed on the official Income Tax Department’s e-filing portal, which is accessible to all taxpayers in India. However, for added convenience and guidance, you can also file your returns through authorized intermediaries like TaxBuddy. The TaxBuddy platform allows users to file ITR online, providing them with tools to simplify the process. TaxBuddy’s integration with the e-filing portal means your returns are filed securely, and the platform ensures that the necessary details are submitted in the correct format.

   
   

4. Can I switch from ITR-4 to ITR-3 mid-year? Yes, you can switch from ITR-4 to ITR-3 mid-year if your financial situation changes or if your income exceeds the ₹50 lakh limit for presumptive taxation. ITR-3 is for freelancers who maintain books of account and report their actual income after expenses, which may be necessary if your income from freelancing and other sources (like capital gains or rental income) increases beyond the limits set by Section 44ADA for presumptive taxation. If this happens, you will need to start maintaining detailed financial records and file ITR-3, which accommodates a wider range of income sources and business structures.

   
   

5. What if I have capital gains from stocks? If you have capital gains from stocks, you must file ITR-3, as ITR-4 does not support reporting of capital gains except under specific conditions, like capital gains from equity investments under Section 112A. Capital gains from stocks, mutual funds, and other securities need to be reported accurately in ITR-3, which is designed to handle such income. Freelancers who earn income from investments must report these earnings in the appropriate section of ITR-3 and can also claim deductions for long-term capital gains (LTCG) under the provisions of Section 112A, subject to applicable conditions.

   
   

6. Is GST registration mandatory for freelancers? GST registration becomes mandatory for freelancers only if their annual turnover exceeds ₹20 lakh (₹10 lakh for special states like Jammu & Kashmir, Himachal Pradesh, and others). If a freelancer's gross receipts surpass this threshold, they are required to register for GST and comply with GST laws, including issuing GST-compliant invoices and filing GST returns. However, freelancers with turnover below this limit are not obligated to register for GST but can voluntarily choose to do so if they want to claim input tax credits or do business with GST-registered clients.

   
   

7. What is the due date for filing ITR for freelancers? The due date for filing ITR for freelancers who are not under audit is typically July 31. However, if the freelancer’s financial records require an audit (i.e., their business turnover exceeds ₹1 crore), the due date is extended to October 31. It is crucial to file ITR before the deadline to avoid penalties and interest on any unpaid tax. If you file a belated return after the due date, penalties may be levied under Section 234F, which can be as high as ₹5,000, depending on when the return is filed.

   
   

8. Can I claim deductions under Section 80C for freelance income? Yes, freelancers can claim deductions under Section 80C of the Income Tax Act for eligible investments. These include contributions to Provident Fund (PF), National Savings Certificate (NSC), Public Provident Fund (PPF), life insurance premiums, and others, up to a total limit of ₹1.5 lakh in a financial year. These deductions reduce the total taxable income, thereby lowering the tax liability. Freelancers can take advantage of these deductions as long as they meet the criteria for the investments and expenses involved.

   
   

9. Do I need to maintain books of account for ITR-4? No, freelancers filing ITR-4 under the presumptive taxation scheme do not need to maintain detailed books of account. ITR-4 simplifies the process by allowing freelancers to declare 50% of their gross receipts as taxable income, with the remaining 50% assumed to be their expenses. This eliminates the need for detailed record-keeping of business expenses, making it a hassle-free option for freelancers who are eligible for presumptive taxation. However, if your income exceeds the limit for presumptive taxation or you have multiple sources of income, you will need to file ITR-3, which requires maintaining books of account.

   
   

10. How do I know which ITR form to use? The choice of ITR form depends on the type and amount of income you earn. If you are eligible for presumptive taxation under Section 44ADA (for freelance work with a gross receipt of up to ₹50 lakh), you should use ITR-4. On the other hand, if you have other sources of income (like capital gains, rental income, or income exceeding ₹50 lakh), you will need to file ITR-3. It is crucial to assess your income structure and tax situation to choose the right form, as filing the wrong form can lead to penalties or delayed processing of your return.

    
    

11. Can I claim tax deductions for health insurance premiums? Yes, freelancers can claim tax deductions under Section 80D for health insurance premiums paid for themselves, their spouse, children, and dependent parents. The deduction is available up to ₹25,000 for individuals below the age of 60, and up to ₹50,000 for senior citizens (above 60 years of age). Health insurance is an important tax-saving tool, and freelancers who pay for their own health coverage or that of their family can use this deduction to reduce their taxable income.

    
    

12. What happens if I file the wrong ITR form? Filing the wrong ITR form can lead to several complications, including penalties, rejection of the return, and delays in the processing of refunds. The Income Tax Department may treat the return as defective if it is filed incorrectly. If you realize the mistake before the due date, you can file a revised return with the correct form. However, if the return is filed after the due date, you may face a late filing penalty under Section 234F, which can range from ₹1,000 to ₹5,000 depending on how late the return is filed. Therefore, it's essential to choose the correct ITR form based on your income sources and tax situation to avoid such issues.