Freelancers Receiving Tax Notices? TaxBuddy Has Your Back

Farheen Mukadam
Aug 29
9 min read

Freelancing has become an increasingly popular career choice, offering flexibility and independence. However, along with these advantages comes the responsibility of managing taxes, which can often be a complex and confusing process. Freelancers are required to file their taxes accurately and on time, but even with the best efforts, they may sometimes receive tax notices from the Income Tax Department. These notices can be intimidating, but understanding the common reasons behind them and knowing how to handle them can alleviate the stress. Let us explore why freelancers might receive tax notices, the relevant tax laws under Section 44ADA of the Income Tax Act, and how platforms like TaxBuddy can assist freelancers in managing their tax obligations effectively.

Why Do Freelancers Receive Tax Notices?

Freelancers may receive tax notices for a variety of reasons, typically stemming from discrepancies, errors, or failures in theirtax filings. The most common reasons for receiving a tax notice include:

Underreporting of Income: Freelancers are required to report all their earnings, including income from clients, consulting, and other freelance projects. If any income is underreported or missed, it may trigger a notice from the tax department.
Incorrect Deduction Claims: Freelancers can claim deductions for business-related expenses like office supplies, software, and internet bills. However, if deductions are claimed incorrectly or without proper documentation, the tax authorities may issue a notice.
Failure to Pay Taxes on Time: Freelancers are expected to pay advance tax quarterly if their tax liability exceeds ₹10,000 in a year. Missing these payments or failing to pay the required amounts can lead to penalties andtax notices.
Mismatch in TDS and Reported Income: Sometimes, the tax department may issue a notice if there is a mismatch between the Tax Deducted at Source (TDS) reported by employers or clients and the income reported by the freelancer.
Failure to File ITR: If a freelancer misses the tax filing deadline or does not file their return at all, they may receive a notice from the department asking them to submit their ITR.

Understanding the common reasons for tax notices can help freelancers prevent these issues and ensure they remain compliant with tax regulations.

Income Tax Act 1961 – Section 44ADA (Presumptive Taxation Scheme)

Section 44ADA of the Income Tax Act 1961 offers a simplified taxation scheme for freelancers and professionals engaged in professions like writing, designing, consultancy, technical services, etc. Under this scheme, freelancers can avail of a presumptive taxation benefit, which allows them to declare 50% of their total receipts or turnover as income. This means that only 50% of the total income is taxed, while the remaining 50% is presumed to be business expenses, and no further documentation or detailed expense breakdown is required.

This scheme is particularly beneficial for freelancers who don’t have complex business expenses or don’t want to go through the hassle of maintaining detailed financial records. To avail of the benefits of Section 44ADA, freelancers must ensure that their gross receipts or turnover do not exceed ₹50 lakhs in a financial year.

While Section 44ADA simplifies tax filing, freelancers must ensure that their gross receipts are properly reported and that they comply with the requirements of the scheme to avoid any tax notices related to underreporting income or incorrectly claiming deductions.

Handling Tax Notices

Receiving a tax notice can be unsettling, but it’s important not to panic. Here’s a step-by-step guide on how to handle a tax notice:

Read the Notice Carefully: The first step is to thoroughly read the tax notice to understand the reason behind it. Notices usually specify the issue—whether it’s related to underreported income, discrepancies in deductions, or missed filings.
Check for Mistakes: Compare the details mentioned in the notice with your filed ITR and records. Ensure that the information provided by the tax department is accurate. Sometimes, notices are issued due to system errors, and discrepancies can be rectified.
Gather Supporting Documents: If the notice involves discrepancies in income or expenses, gather the relevant documents like invoices, bank statements, receipts for deductions, and any TDS certificates. These documents will support your case if you need to respond to the notice.
File a Revised Return (if necessary): If you find any errors or omissions in your original tax return, you may need to file a revised return. A revised return can be filed within the assessment year and will correct any mistakes made in the initial filing.
Respond to the Notice: If required, respond to the tax notice with the necessary documents and clarification. If the notice is about missing information or errors, provide the correct details and explain any discrepancies.
Pay Any Due Taxes: If the notice indicates that additional taxes are due, ensure that you make the necessary payment to avoid further penalties or interest charges.

Handling tax notices in a timely and accurate manner helps resolve issues swiftly and prevents additional complications.

How TaxBuddy Supports Freelancers

TaxBuddy offers comprehensive support to freelancers to ensure they comply with tax laws and avoid tax notices. Here’s how TaxBuddy can assist:

Easy Tax Filing: TaxBuddy simplifies the process of filing tax returns by offering an intuitive platform that guides freelancers through every step of the process. It ensures that you report your income and deductions correctly.
Expert Assistance: If you need personalized help, TaxBuddy’s team of tax experts is available to assist freelancers in filing accurate returns and addressing any complexities in their tax filings.
TDS Credit Matching: TaxBuddy helps freelancers ensure that TDS credits are correctly reflected in their returns, preventing any mismatches with the information reported by clients.
Automatic Calculation of Presumptive Tax: If you qualify for Section 44ADA, TaxBuddy helps you calculate and file your presumptive tax returns, ensuring that the 50% of income is correctly declared as business income.
Audit and Notice Assistance: If you do receive a tax notice, TaxBuddy helps you understand the nature of the notice and assists in responding with the necessary documentation and clarifications.

With TaxBuddy, freelancers can navigate the complexities of tax filing with ease, ensuring compliance and reducing the risk of tax notices.

Freelancer-Specific FAQs

Q1: Do freelancers have to file taxes if their income is below ₹2.5 lakh? Yes, even if your income is below ₹2.5 lakh, you must file your tax return to ensure compliance. Freelancers need to report their income and claim any available deductions.

Q2: How can freelancers claim deductions for business expenses? Freelancers can claim deductions for business-related expenses such as office supplies, software, internet bills, and other work-related costs. These deductions reduce taxable income.

Q3: How do I apply for the presumptive taxation scheme under Section 44ADA? To avail of Section 44ADA, simply report your gross receipts or turnover under the scheme while filing your ITR. You don’t need to provide detailed records of your expenses.

Q4: What if I missed filing my taxes on time as a freelancer? If you missed the deadline, you can file a belated return, but you will face penalties and interest. It’s important to file as soon as possible to minimize the penalties.

Q5: How does TaxBuddy help me file taxes as a freelancer? TaxBuddy simplifies the process by offering tools for accurate income reporting, tax deduction claims, and support for filing both self-assessment and expert-assisted returns.

Conclusion

Freelancers face unique challenges when it comes to filing taxes, but with the right knowledge and support, they can navigate the process smoothly. By understanding the tax laws, such as Section 44ADA, and using reliable tools like TaxBuddy, freelancers can ensure compliance, avoid tax notices, and even optimize their tax savings. Whether you need help with tax filing or responding to notices, TaxBuddy offers the expertise and tools to make tax season stress-free. For a seamless tax filing experience, you can easily manage your returns with theTaxBuddy mobile app.

FAQs

Why do freelancers receive tax notices from the Income Tax Department?

Freelancers may receive tax notices from the Income Tax Department for various reasons, such as discrepancies in income reporting, failure to file ITR on time, or underreporting of earnings. The department may also issue notices if the taxpayer fails to provide supporting documents for claimed deductions or tax credits. Additionally, if the income is not reported accurately or the tax paid is less than the calculated amount, it could trigger a notice for clarification or further scrutiny. Freelancers should ensure that all income is reported accurately, deductions are properly claimed, and returns are filed on time to avoid such notices.

2. What tax provisions apply to freelancers under Indian law?

Freelancers are subject to the same tax provisions as self-employed individuals under Indian tax law. They are required to pay income tax on their earnings, and the income is classified under the head "Income from Business or Profession." Freelancers must maintain records of their earnings, and they are eligible to claim deductions for business-related expenses like office rent, equipment, and travel. Additionally, freelancers must pay advance tax if their total tax liability exceeds ₹10,000 in a financial year. They are also required to comply with TDS (Tax Deducted at Source) provisions.

3. How can freelancers calculate and file their taxes?

Freelancers can calculate their taxes by determining their gross income, subtracting allowable expenses, and applying the relevant tax slabs to the net income. Common business expenses like office rent, internet bills, equipment costs, and travel expenses can be claimed as deductions. Once the net income is calculated, freelancers must file their tax returns, either manually or using an e-filing portal like TaxBuddy. The income is subject to taxation under the applicable slab, and advance tax may need to be paid in quarterly installments.

4. Is there a tax exemption for freelance income?

There is no specific tax exemption for freelance income in India. Freelancers are taxed on the income they earn, similar to salaried individuals, unless they qualify for specific deductions or exemptions. For example, freelancers can claim deductions under sections like 80C (for investments in provident funds, insurance, etc.) or80G(for donations). However, there is no blanket exemption for freelance income, and it is fully taxable under the head "Income from Business or Profession."

5. What is the Presumptive Taxation Scheme for freelancers?

The Presumptive Taxation Scheme under Section 44ADA allows eligible professionals, including freelancers, to declare 50% of their total gross receipts or turnover as income. This simplifies the tax filing process, as freelancers under this scheme do not have to maintain detailed books of accounts. To qualify, freelancers must meet specific conditions, such as being a resident individual, HUF, or a partnership firm and providing professional services like writing, graphic design, or consulting. This scheme is beneficial for those with income up to ₹50 lakh in a financial year.

6. How do freelancers report their income from multiple clients?

Freelancers must report their total income from all clients under the head "Income from Business or Profession" in the ITR. Each client’s payment is considered part of the total freelance income. It’s important for freelancers to maintain a record of payments received from various clients, including invoices and contracts. This income is aggregated for tax purposes, and any business-related expenses can be deducted to calculate taxable income.

7. What business expenses can freelancers claim for tax deductions?

Freelancers can claim a wide range of business-related expenses as tax deductions. These include office rent, utilities (electricity, internet), travel expenses, professional fees (like accountants or consultants), office supplies, and depreciation on business assets (such as computers or office furniture). It’s essential to maintain proper documentation, such as invoices and receipts, to substantiate these expenses in case of an audit.

8. How do I file a revised return if I make a mistake?

If a freelancer realizes there is an error in their filed ITR, they can file a revised return under Section 139(5). This must be done before the end of the relevant assessment year. The revised return should reflect the correct details, such as income, deductions, and tax credits. Freelancers can use platforms like TaxBuddy to file a revised return and rectify any mistakes in income reporting or claim missed deductions.

9. What happens if I miss the tax filing deadline?

If you miss the tax filing deadline, you can file a belated return, but you will be subject to penalties and interest on any unpaid taxes. The belated return must be filed before the end of the assessment year (usually December 31). Additionally, taxpayers filing belated returns may not be able to claim certain benefits, such as carry-forward of losses. It’s always best to file on time to avoid these penalties and complications.

10. Can freelancers claim deductions under Section 80C?

Yes, freelancers can claim deductions under Section 80C of the Income Tax Act. This section allows deductions for investments in specified financial instruments, such as the Employee Provident Fund (EPF), Public Provident Fund (PPF), life insurance premiums, National Savings Certificates (NSC), and more. Freelancers can invest in these options and claim deductions up to a limit of ₹1.5 lakh per year under Section 80C, reducing their taxable income.

11. How do TDS and tax credits affect my freelance tax filing?

TDS (Tax Deducted at Source) and tax credits play a significant role in a freelancer's tax filing. Clients who pay freelancers may deduct a certain percentage of the payment as TDS, which is then deposited with the government on the freelancer’s behalf. This amount is reflected in the freelancer’sForm 26AS. Freelancers can claim these TDS amounts as a credit against their total tax liability. If the TDS credit is higher than the tax due, freelancers may be eligible for a refund.

12. Does TaxBuddy help with handling TDS credits and filing?

Yes, TaxBuddy helps freelancers handle TDS credits during the tax filing process. The platform automatically integrates and verifies TDS details from Form 26AS, ensuring that the TDS credits are accurately reflected in the ITR. TaxBuddy’s AI-driven platform makes it easy for freelancers to track TDS credits, claim them correctly, and reduce the chances of errors that could delay the processing of their returns or refunds.