Simplifying Tax on Freelance Income, types of accounting methods, GST

Freelancing has seeped into everyday conversations and has been streaming meadows of opportunities and possibilities. It harbours flexibility in its structure and is subjective for every client. It is interesting to see how freelancing is getting organized, more defined, and accessible while retaining its essence of flexible work hours. Speaking of which, let us explore the organization part of it and understand different facets of tax on freelance income.

Freelance income refers to payment received for completing specific assignments within a set timeframe without being an employee or receiving company benefits such as PF. Freelancers exercise the flexibility to work from any location if they meet the agreed deadline.

In India, income earned through the display of intellectual or manual skills is considered professional income and is subject to taxation under the category of "Profits and Gains from Business or Profession". Tax on freelance income is not as complicated as it seems.

Your gross income is the total amount received for all professional work, which can get tracked through your bank account statements. It is worth noting that it is possible when payments get received through banking channels.

Following the trajectory of a tax-paying structure, freelancers can claim expenses as deductions from their income!

Let us quickly understand the conditions to go through with the process of availing deductions.

The cost is related to the ongoing freelance work and has been fully and exclusively used for that purpose.

It was incurred during the current tax year, and it is not a capital or personal expense of the freelancer.

Additionally, it was not incurred for any illegal or prohibited purpose.

What are the types of expenses that can get claimed while freelancing?

Let us find out.

If you rent a property for your freelance work, the rent paid can get deducted. Depreciation can get claimed for capital assets purchased for your freelance work, with a portion of the cost expensed each year. The cost of repairs to the rented property or your business property, as well as repairs to equipment such as laptops and printers, can also be deducted. Office expenses, such as purchasing supplies or paying for internet or telephone bills, can be claimed as a deduction. Travel expenses for meeting clients, meal and entertainment expenses related to conducting business, local taxes and insurance for your business property, and expenses related to domain registration and purchasing apps for testing your product are also allowed as deductions.

But you must look into the classification of the types of assets, methods of depreciation, and rates of depreciation established by the Income Tax Act.

Two types of accounting methods can be used to determine income and expenses for freelancers tax:

Accrual Basis of Accounting:

This method books income when the right to receive it arises and expenses when the obligation to pay arises. Tax liability is determined when income is booked, which may result in tax being payable even if income has not yet been received. This method is mandatory for certain types of income, such as salary, house property, and capital gains, but can be used for all income types.

Cash Basis of Accounting:

This method books income when it is received and expenses when they are paid. Tax liability is determined in the year income is received, which means taxes are only payable when income is in hand. This method is only allowed for profits and losses from business/profession and income from other sources.

It is important to note that the accounting method chosen must be used for all clients, revenues, and expenses. Changing the accounting method frequently to save or avoid taxes is not allowed under the Income Tax Act. Section 44AA and Rule 6F prescribe the books of accounts that must be maintained for income tax purposes.

Note: Your net taxable income gets calculated by deducting the allowed deductions from your gross taxable income.

Under Section 80C, you can claim a deduction of up to Rs.1.5 lakh for the amount invested/spent. If you are 60 years old or above and your net taxable income is over Rs.2.5 lakh, you are liable to pay tax on your income.

Advance tax on freelance income

If your total tax liability for the year exceeds Rs.10,000, you must pay taxes every quarter as advance tax. To pay advance tax, you can either do it online through the IT Department’s website or by filling out a paper challan and depositing the tax by visiting your bank physically.

Individuals who opt for the presumptive tax scheme, including independent professionals such as doctors, architects, and other skilled professionals, must pay the entire amount of advance tax in a single instalment before March 15 or by March 31 to fulfil their tax obligations.

What about GST compliance?

To determine if you need to apply for GST, you should check if your aggregate turnover exceeds Rs.20 lakhs (or Rs.10 lakhs for North-eastern and hill states) in a year. You can calculate your aggregate turnover by referring to our article on the subject. You can make GST payments online, and it is mandatory to do so if your payments exceed Rs.10,000. You must deposit GST to the government either quarterly or monthly, depending on your turnover and choice of composition scheme. If you fail to deposit service tax on time, interest will get charged.

If you have queries about tax on freelance income specifically based on your clientele, allow one of the tax experts at TaxBuddy to assist you throughout the process.

Still have some doubts about tax on freelance income?

Check out FAQ’s below

1) Are freelancers supposed to file TDS returns?

Freelancers may receive their payments after tax has been deducted at the source, and they may also need to deduct tax at the source before making a payment. If a freelancer or small business owner makes a payment exceeding Rs.30,000 per transaction or in total during a financial year to professionals, TDS will apply at a rate of 10%. Besides, the tax deducted at the source must get deposited with the government.

Moreover, a freelancer must only deduct tax at source if they were audited during the previous financial year, which only takes place if their annual gross receipts exceed Rs.50 lakhs. If the annual gross receipts do not exceed this amount, then there is no need to deduct tax at the source. The freelancer needs to check if TDS applies to all payments covered under TDS provisions. Once taxes get deducted, the freelancer must deposit the tax and file TDS returns.

2) Which ITR form applies to freelancers?

ITR-4 is the applicable tax return form for individuals who opt for presumptive income schemes as per Sections 44AD and 44AE of the Income Tax Law. Freelancers who fall under the professions specified in Section 44ADA have business incomes as per Sections 44AD or 44AE, salary, pension, or any other type of income exceeding Rs. 50 lakhs are also required to file their taxes using the ITR-4 form.