A guide to help Freelancers in Tax
Who is a Freelancer?
A Freelancer is a person who is self-employed and is not necessarily committed to a particular employer for long-term.
What is Freelancing Income?
Freelancing Income is the income which is earned from any profession that includes work, which requires a person to use a skill (manual/intellectual).
Is Freelancing Income taxable?
Yes, as per the Income Tax Act, Freelancing Income is taxable under the head ‘Profits and Gains of Business and Profession’.
Expenses incurred by the Freelancers is Deductible
Freelancers are allowed to deduct the expenses which they have incurred from their income.
Books of Accounts for Freelancers
There are two methods of accounting for Freelancers:
1. Accrual/Mercantile Method
2. Cash Method
Accrual Method Cash Method
- Accounting for income is done on accrual basis, i.e., income to be received is received.
- Accounting for income is done when the income is received.
- Accounting for expenses is done when there is obligation of payment.
- Accounting for expenses is done when the expenses are paid.
- This method can be used for recording all types of income, basically for salaries, house property and capital gains.
- This method can only be used for Profits and Gains.
From business and profession and Income from Other Sources.
Total Taxable Income for a Freelancer
The net taxable income equals the gross taxable income less deductions, i.e.,
Net Taxable Income = Gross Taxable Income -Deductions
A taxpayer can avail the benefit of deductions under Section 80C of the Income Tax Act. An income of up to Rs. 1.5 lakh can be claimed for deductions under Section 80C.
Tax Payable by a Freelancer
If the tax liability for a financial year exceeds Rs. 10,000, then the taxpayer is required to pay tax every quarter, which is known as ‘Advance Tax’. The advance tax must be paid by the taxpayers on their due dates.
Due dates for Advance Tax Payments
Due Dates Amount of Advance Tax
15th September Up to 30% of advance tax
15th December Up to 60% of advance tax
15th March Up to 100% of advance tax
Calculation of Advance Tax – Tax calculator
Follow these steps to determine your Advance Tax:
1. Find your Total Income by adding all the receipts
2. Subtract the expenses that are directly related to your work
3. Add the income from other sources
4. Calculate the due tax by finding the tax slab which you belong to
5. Deduct the TDS (Tax deducted at source)
6. If the due tax exceeds Rs. 10,000, then you have to pay the Advance Tax.
Methods of Advance Tax Payment
There are two methods of payment of Advance Taxes:
1. Online payment through the website of Income Tax Department.
2. By filling Challan and paying by visiting the bank.
Penalties for Non-Payment of Advance Taxes
Interests under Sections 234B and 234C are applicable if the taxpayers don’t pay their Advance Tax. Section 234B is applicable if the advance taxes have not been paid according to the due dates and Section 234C is applicable if the interests have not been paid according to these due dates.
Which ITR should be filed by the Freelancers in order to file their tax returns?
Freelancers must file their income tax returns using ITR-4.
Other taxes which are applicable for Freelancers
• Value Added Tax (VAT) – If someone is engaged in business and sells goods, then VAT is applicable in such case.
• Service Tax- If someone is engaged in a service providing business, then he is required to pay Service Tax. This tax is recovered by the person providing the service from his clients who are receiving the service by paying this tax along with the price charged for the service.
Related Topic: ITR 2A Form