Freelancers are self-employed people. They work either from home, cafe, park or on field basis. They are the one who works for the company and received revenue only after completing the given task.
The freelancers could be from any field such as marketing, designing, web designing, social media content writing, selling, etc. As they are receiving amount after delivering the services, they are required to pay tax upon the same. As per the basic provision of Income Tax India Act, 1961, every individual is required to pay tax on the income unless and until any specifications given for particular income. So, the freelancers are also required to pay tax on their income.
What is freelancing income and it comes under which head?
Freelancers receives Freelancing income after completion of given assignments. The assignments can vary from company to company (It’s not necessary that freelancers need to be appointed by companies only, they can be appointed by anyone).
But freelancer will not be considered as an employee of the company, they will not get basic perks of being employee such as PF, paid leaves, etc. Freelancers are not required to go to the office – in fact, they can complete the work at leisure (by pre-agreed deadline) from any place convenient to them.
Taxability of Freelancing Income:
Freelancing income is taxable in the head of “Business & Profession”. It cannot be taxable in the head of Salaries as freelancers don’t receive any fixed amount of income on regular basis. They received an income after completing their given tasks.
Any income that is earn by displaying intellectual or manual skills is the income from a profession according to income tax laws in India. Such income will be taxable as “Profits and Gains from Business or Profession”. The gross income of freelancer will be the aggregate of all receipts he gets in the course of carrying out profession. His bank account statement is a document on which can rely on to cull out this information, provided that he has received all his professional income through banking channels.
What are the expenses allowed as a deduction under Freelancing Income?
Freelancers can claim deduction for the expenses they incurred while performing freelancing job. The expenses could be anything such as cab fare, or purchasing any stuff for freelancing purpose, etc., but all the expenses should be directly related to the job of freelancing.
Following are the conditions to claim deduction from freelancing income;
· The expense should occur while performing freelancing work only
· It should be spent fully and exclusively for the purpose of freelancing work only
· The capital or personal expenditure of freelancer can’t claim
· There should be no any expense which has been prohibited by law
· It should be incurred during a tax year
Following is the list of expense that can be claimed as a deduction;
· Rent of the property
If you take a property on rent for carrying out your work, the rent paid can be deducted.
· Repairs undertaken
If you have agreed to pay for repairs to the rented property, then these repair costs can be deducted. If you own the business property and carry out repairs, those are also allowed to be deducted. Any repairs to your laptop, printer, and other equipment are also allowed to be deducted.
When you purchase a capital asset, the benefit of such asset is usually expected to last more than a year. Such assets are capitalized and not charged to expenses when they are bought. Every year a small portion of its cost is expensed and is allowed to be reduced from your income. This expense charged every year is called depreciation.
· Office expenses
Expenses incurred to carry out your work such as purchasing a printer, office supplies, your monthly telephone bills, internet bills, and conveyance expenses can be claimed as a deduction.
· Travel Expenses
The cost of travel to meet your clients within or outside of India is allowed as a deduction.
· Meal, entertainment or hospitality expenses
It can be claimed when you conduct client meetings, take your clients out for dinner, or some other outings and money has been solely spent with the intention of getting new business or retaining existing business.
· Local taxes and insurance for your own business property
· Domain registration and apps purchased to test your product are also allowed as expenses.
Total taxable income and tax payable
One can reduce their tax liability by claiming deductions under section 80C. In that, Section 80C of the Income Tax Act, 1961 offers tax relief on certain expenses and encourages taxpayers to save for the future (by giving deductions on investments in financial products).
Net Taxable Income = Gross Taxable Income – Deductions
You can reduce your taxable income by up to Rs.1.5 lakh by claiming deduction for the amount actually invested/spent under this section. If you are aged within 60 years and your net taxable income is more than Rs.2.5 lakh, you are liable to pay tax on your income.
Tax payable for a freelancer
If the total tax liability during a financial year exceeds Rs.10,000, the taxpayer is required to pay taxes every quarter. This is called advance tax.
How to calculate advance tax?
· Add up all your receipts and determine your total income.
· Subtract expenses directly related to your work.
· Add income from other sources, say a house property or savings account.
· Find out the tax slab you belong to and calculate your tax due.
· Remember to deduct TDS
· If the tax due exceeds Rs.10,000, you are required to pay advance tax by the following due dates.
Check out the below table to know the due dates to pay advance tax
% of Advance Tax
On or before 15th June
Not less than 15% of advance tax
On or before 15th September
Not less than 45% of advance tax as reduced by the tax paid in the last installment.
On or before 15th December
Not less than 75% of advance tax as reduced by the tax paid till the last installments.
On or before 15th March
The whole amount (100%) of advance tax as reduced by the tax paid till the last installments.
Penalties for non-payment of advance tax
Interest under Section 234B and Section 234C is applicable when you don’t pay your advance tax.
Section 234B applies when Advance Tax has not been paid and since Advance Tax is payable as per dates set out by the IT Department, 234C is applicable when interest is not paid according to these due dates.