Income Tax Filing (ITR) for Freelancers in India: Types & Steps

Freelancers are self-employed persons with certain common features;

• They do not work on a regular salary for anyone.
• A freelancer can work for different clients on different projects at a pre-agreed price.
• Freelancers can work from their homes, public places, a retain place, or any other location that they are comfortable working.

With an estimated 15 million freelancers, the freelancer market in India is one of the fastest-growing in the world. There can be many reasons to choose to freelance over a regular job.

• Many people find it hard to work for fixed hours that are demanded in a regular job.
• Freelancing can provide an opportunity to grow at one’s own pace.
• There is no limit on work and earnings for deserved freelancers.

So, how can freelancers file their income tax returns efficiently to save taxes or avail of tax benefits or exemptions?

Freelancers implement their manual or intellectual skills to earn money. They do not get many employee-specific facilities such as provident funds, ESI, gratuity benefits, or bonuses.There can be various income sources in freelancing, such as

• Many people find it hard to work for fixed hours that are demanded in a regular job.
• Freelancing can provide an opportunity to grow at one’s own pace.
• There is no limit on work and earnings for deserved freelancers.

• Affiliate Marketing An affiliate marketer earns money through commissions paid by online retailers for generating website traffic, sales, or referrals to the main website through the affiliate link of the marketer.
• Social Media Influencing Social media influencers use their social media connections to promote a product.
• Services and Consultation
• Freelancers can offer their services for fees in diverse fields like marketing, content writing, graphic designing, software, tax consultation, photography, and so on.
• Teaching A teacher who teaches independently without being associated with any school or college as a paid employee is a freelancer.

Since freelancers can have multiple clients and no fixed income, their income tax filing process is slightly different than salaried individuals.

Following are some possible income sources other than freelancing.

• Income from the property in the form of sale or rental return
• Interest income from bank term deposits
• Income from trading in the stock market
• Any other type of income

All such income sources should be disclosed while filing your tax returns.

There are two types of accounting methods that can be used by freelancers.

• Accrual Basis
• Cash Basis

Note that,

• You will have to follow the same accounting method for all of your clients, revenues and expenses.
• You cannot change your accounting method frequently. Whatever accounting method you choose, you should follow that method for at least two to three years.
  Frequently changing your accounting methods can give an impression of tax avoidance that may result in facing the irk of tax personnel.
• Under Section 44AA and Rule 6F of The Income Tax Act , it is mandatory for businesses to maintain books of accounts for the purpose of income tax if the gross receipts from the profession are more than Rs 1,50,000 in three preceding years.Certain professions like accountancy, film artist, medical, engineering, etc., come under the purview of this rule. However, professions, like blogging, writing, etc., are not yet listed under this rule and hence exempted to comply.

While the cash basis of accounting may appear simpler at first glance, it can actually just postpone your tax liability. Furthermore, this method is unlikely to reduce your tax liability.On the contrary, the accrual basis of accounting can be more logical as well as tax saving for your freelancing business unless you face irregularity, uncertainty, or unpredictability in receiving your payments.Therefore, it is advisable to follow the accrual basis of accounting.

Freelancers earn money by implementing their manual or intellectual skills. Such type of income is considered as “profits and gains from business and profession” as per the income tax act of India.The financial year in India is the period starting from April 1st of a year to March 31st of the next year. The total income earned during this period is considered as the gross income for that year. Loans taken during this period are not considered as income.

This is the most important part of calculating taxable income for a freelancer. Since freelancing is considered a business, a freelance professional can deduct all those expenses from his gross salary that are necessary for the smooth functioning of his business.These expenses can be in any form depending upon the type of work, such as;

• Internet and telephone charges
• Software licensing fees
• Procuring or maintenance of operational software
• Rent payment unless the rent is paid to a relative.
• Repairing of rented property, equipment like laptops, printers, etc.
• Travel expenses
• Website domain registration and purchasing apps to test your products.
• Insurance for your business property

You are allowed to claim these deductions only if they are expenses for your business. For example, you can claim deductions under travel expenses if you've travelled for business purposes and not for personal reasons.However, some expenses, like internet and mobile phone bills, can be classified as business as well as personal expenses. In such cases, you can find out the percentage of use for businesses and claim deductions accordingly.

Business assets such as buildings, office furniture, computers, camera, electronic gadgets, etc., do not have a fixed value. Their value decreases with each passing year due to operational wear and tear. This decrease in the value of such assets is called depreciation.For example, consider you bought a laptop for your business in the year 2015 at a price of Rs 50,000. You sold the laptop in 2020 at a price of 25,000.Therefore, the value of that laptop depreciated by 50 per cent in five years. However, you have also used the laptop for five years. Therefore the actual depreciation would be less than 50 per cent.In the above example, how would you have calculated the value of the laptop two years after the initial purchase?The concept of depreciation is used to calculate the present value of certain products that you have been using for a while. Generally, a percentage of the original value of the product is accounted for as depreciation cost. It may differ from one product to another.You can include depreciation costs for all such products like vehicles, computers, peripherals, gadgets, and other such tangible assets if you use these products for your freelancing work.

Freelancers can claim a number of tax deductions similar to salaried persons or businessmen if they choose the old tax regime while filing their returns. These deductions are grouped under Section 80 of the income tax act.

Many clients of freelancers make payments after deducting TDS (Tax Deducted at Source) . You can see all the TDS deductions against your payment in Form 26AS. You can access your Form 26AS from the website of TRACES. It is linked to your PAN.All the TDS deducted in a year can be claimed while filing your income tax return subject to your eligibility.

Advance tax, if applicable, is required to be paid quarterly.You can find out your advance tax liability by following these steps.

• Determine your freelancing income.
• Deduct all your expenses.
• Add income from other sources.
• Deduct TDS
• If the tax liability is still above Rs 10,000, then you will have to pay advance tax.

Non-payment of advance tax can attract an interest penalty under different sections of income tax laws.

GST is applicable for freelancers if they sell goods or provide a service and bill their clients accordingly. The GST rates can vary depending upon goods and services offered by the freelancer.However, GST is not applicable if the annual income of the freelancer is less than Rs 20 lakhs. Furthermore, GST is not applicable to exports.

Earlier, presumptive taxation was only available to businessmen. Now, this scheme is extended to freelancers as well. As a freelancer, you can avail of this scheme if your annual income is less than Rs 50 lakh. This scheme can be suitable for those who find account bookkeeping time-consuming and tedious.The presumptive assumption rate for freelancers is 50 per cent of the gross annual turnover.

The income tax slabs for freelancers is the same as for salaried or business persons. Following is the income tax slabs applicable for individuals below the age of 60 years.

Freelancers can use ITR-4, also known as Sugam, to file their income tax returns. The income tax return rules vary depending upon your annual income.

• Less than 1 Crore You don’t need to have your accounts audited.The last date of submission is usually July 31st every year.
• 1 Crore or More Your accounts book should be audited and certified by a chartered accountant.The last date of submission is usually September 31st every year.

You will need ITR Form 4S if you opt for presumptive taxation.Now that you are well aware of how to calculate income tax on freelancing and how to avail of the tax benefits and exemption with proper planning and accounting process, you will surely feel proud of yourself for choosing freelancing as a profession.Moreover, knowing the tax filing process can help you in scaling your business in future.Ready to make the most of your money? Start your tax planning journey now!

The information contained herein is generic in nature and is meant for educational purposes only. Nothing here is to be construed as an investment or financial or taxation advice nor to be considered as an invitation or solicitation or advertisement for any financial product. Readers are advised to exercise discretion and should seek independent professional advice prior to making any investment decision in relation to any financial product. Aditya Birla Capital Group is not liable for any decision arising out of the use of this information.