Filing an income tax* return is an important responsibility of every taxpayer in India. It is the basis by which the government assesses every individual's income and expenditure and provides a medium to claim a valid refund.

A freelancer is a self-employed person who doesn’t work for a particular employer. Instead, they work for different clients and do not receive a fixed amount of salary. Therefore, filing an income tax return is slightly different for a freelancer compared to a salaried person.

There are also deductions, such as premium of life insurance policy, and exemptions applicable to the taxable income of freelancers. Here is a brief on how freelancers can file income tax^*

What is a freelancing income?

An income received from a specific profession or involving skilled work is taxable. Therefore, the freelancer’s income is considered under the category “Profits and Gains of Business and Profession”.

A freelancer should compute their profit from professional services. Freelancers should also disclose details of debtors, creditors, bank balance and capital invested. The gross income is a total of the freelancer’s receipts for delivering the work for the clients in India or abroad.

The bank account of the freelancer can be used as proof of payment for taxation purposes. A freelancer can claim deductions based on certain conditions. The income tax form for freelancers is either the ITR - 3 or ITR - 4 as per the rules. 

Expenses that qualify for tax deductions

• The business-related expenses of a freelancer incurred in the course of their work are allowed.

• The expenses should have been incurred during the financial year for which the income tax return is to be filed.

• It should not be capital or personal expenditure of the freelancer.

• The cost that is claimed should not be for a purpose or process prohibited by law.
  
  

Tax tips for freelancers

Here are a few expenses eligible for considering deductions while filing the income tax.

1. Rent for business property

2. Repairs to building and equipment such as computers, laptops, printers etc.

3. Depreciation on assets

4. Expenses towards utilities such as electricity bills, telephone bills, conveyance bills, office supplies, internet bills etc.,

5. Software licence fee paid annually

6. Business travel expenses

7. Meal, hospitality and entertainment expenses incurred during a business travel

8. Insurance costs associated with the assets or premises used in the profession 

9. Domain registration, apps purchase and maintenance charges for the functional aspects of the business. 
   
   

Tax benefits for freelancers - Presumptive Tax

A taxpayer who is a resident Indian engaged in a profession such as engineering, consultancy, etc., can present the income from such an earning to tax on a presumptive basis. According to Section 44ADA of the Income Tax Act, 1961, the total gross receipts should not exceed Rs 50 Lakh in a financial year for presumptive tax calculation.  

In that case, for the financial year, the taxable income will be presumed to be 50% of the total gross receipts. Thus, a freelancer can file the income tax based on this presumptive taxation scheme. First, however, the taxpayer must maintain books of accounts as proof under Section 44AA if the income from the prescribed profession exceeds Rs.1,20,000. Also, according to Section 44AB, if the turnover or the gross receipts exceeds Rs 1 crore, the law mandates a compulsory tax audit. The presumptive taxation scheme was earlier available for businessmen and now extended to freelancing professionals as well.

Let us consider a small example. Suppose a freelancer's gross annual income is Rs 43 Lakh. And, his expenses related to his work accounts for Rs. 8 Lakh. In that case, under the normal taxation scheme, the taxable income will be Rs. 35 Lakh. However, under the presumptive taxation scheme, the taxable income for the freelancer will be calculated as 50% of the gross income, which is Rs. 21.50 Lakh. There is a drastic change in the taxable income. 

Advance Tax

Freelancers whose total tax liability is more than Rs. 10,000 have to pay the Advance Tax during the financial year. Here are the steps to calculate the advance tax.

1. Add all the receipts corresponding to that financial year to find the gross income. 

2. Calculate the expenses corresponding to the work and subtract them from the gross income. 

3. Add any other source of income if applicable to get the total gross income.

4. Consider the deductions, such as the premium amount paid under a life insurance policy. Tata AIA insurance policy premium also qualify for a tax deduction under Section 80C of the Income Tax^* Act.  

5. Subtract the deductions.

6. Calculate the tax payable based on the income tax slab rates.

7. Add the education cess amount, which is 4% of the payable tax amount.

8. Deduct the TDS amount.
   
   

You will arrive at the advance tax payable amount. Freelancers are not allowed to claim the standard deduction amount of Rs. 50,000 as applicable to the salaried individuals.

Freelancers can pay the advance tax in four instalments.

Due Date	Advance Tax Payable (% of advance tax)
On or Before 15th June	15
On or Before 15th September	45
On or Before 15th December	75
On or Before 15th March	100

 

Based on the first, second and third instalment, if you feel you have to pay more you can adjust the final amount due. If the freelancer delays or does not pay advance tax, interest will be charged.

Conclusion

Tax filing for freelancers in India is quite simple. Freelancers can also benefit from the presumptive taxation scheme and pay the tax and avoid investigation or litigation. They have to maintain proper books of accounts, bank statements, invoices, and expense bills as proof. Calculating advance tax and making the necessary payments in instalments is also very important. To clarify any doubt, they can talk to a Chartered Accountant or check the Income Tax department’s website.