Taxation For Freelancers - Rates, Exemptions, Advance Tax, GST & ITR

With the freelancer or gig economy on the rise, freelancers need to understand how their income is to be calculated, how it will be taxed, and how can they file their income tax returns or pay their taxes. Since you are not working in a regular job, certain additional tax responsibilities apply to you. Freelancing resembles operating your own business and the Income Tax Department accordingly taxes your income as Profit and Gains from Business or Profession. In this article, I’ll help you understand all you need to know about the taxation of freelancing income!

Who is a Freelancer?

If you are a freelancer, you are a self-employed person with the autonomy to select your work and your affiliations with companies or clients. As a freelancer, you are responsible for paying income tax on the earnings you receive from your freelance work. 

Freelancing Income as per the Income Tax Act

The Income Tax Act 1961 states that any income that an individual derives using their physical or mental abilities through freelancing is categorised as "profit and gains from business and profession. So, as a freelancer, you need to pay tax on your freelancing income under the head Income from Business and Profession.

Freelancers need to pay income tax at applicable rates and claim deductions based on their chosen tax regime. 

Taxation Rates for Freelancers

As a freelancer, you need to pay income tax at the applicable slab rates. You can claim deductions under the head business and profession. You can also file ITR under the presumptive taxation scheme under Section 44ADA. The presumptive taxation scheme allows all freelancers to pay tax on only half of the gross annual income if the total annual income does not exceed ₹75 lakhs, as updated in Budget 2023-24.

If your gross annual income, as a freelancer, during a year is more than ₹1 crores, you are required to conduct a tax audit.

For any payment you make to a professional of an amount exceeding ₹30,000, a TDS at the rate of 10% is applicable. 

You can also file income tax returns through the ITR-4 form under the Presumptive taxation scheme. Those who don’t opt for the Presumptive Taxation Scheme can file their returns in ITR-3, which is applicable for income from businesses and professions.

Exemptions or Deductions for Freelancers

If you’re a freelancer, you can claim the following deductions on your income under Sections 80C to 80U: 

• Section 80C: Deductions on various investments like life insurance premiums, ELSS, SSY, NSC, SCSS, payments made towards the principal of a home loan repayment, payments made towards pension plans, NPS payment, etc.
• Section 80D: Deduction on medical insurance premium
• Section 80E: Interest on an education loan
• Section 80EEA: Interest on home loan for first-time homeowners
• Section 80G: Income tax benefits towards donations for social causes
• Section 80GG: Income tax deduction on house rent paid
• Section 80TTA: Interest on savings accounts
• Section 80U: Deduction for disabled individuals

Deductible Expenses Against Freelancing Income

As a freelancer, you can deduct the following expenses against your income:

• • Rental Payments - You can deduct the rent you pay for a property you use for your work.
  • Repair Costs - You can deduct expenses incurred on repairs to rented property, business-owned property, and equipment like laptops and printers.

• Depreciation - When you purchase a long-lasting capital asset, it's not immediately expensed but a part of its cost is gradually deducted over its useful life. This is known as depreciation. The Income Tax Act 1961 specifies the different types of assets, depreciation methods, and rates.

• Office Expenses - The expenses you can deduct as office expenses include office supplies, equipment purchases, monthly telephone & internet bills, and transportation costs related to work.
• Travel Expenses- You can deduct any cost you incur on travelling within or outside India for client meetings.
• Meal, Entertainment, and Hospitality Expenses - You can deduct expenses incurred during client meetings, dinners, or other outings aimed at generating or retaining business.
• Local Taxes and Business Property Insurance - You can deduct local property taxes and insurance for business-owned property.
• Domain Registration and App Purchases - You can deduct any expenses connected with domain registration and the purchase of apps for service delivery or product testing.

When can a freelancer pay Advance Tax?

In India, if a freelancer’s total tax liability as per the slab rate exceeds ₹10,000 for a financial year, then they must pay a tax amount every quarter. This sum paid is known as Advance tax.

To calculate the total tax payable, you need to add the receipts, income in a savings account, & property income, and then deduct the freelance expenses, including TDS.

If you fail to pay your advance tax on time then you may attract penalties under section 234B and section 234C of the Income Tax Act 1961.

Due Dates for Advance Tax

How to Calculate Advance Tax?

Step 1: Add up all your receipts and determine your total income.

Step 2: Subtract expenses that are directly related to your work.

Step 3: Add income from other sources like house property or savings account.

Step 4: Determine which tax slab you belong to and calculate your tax due.

Step 5: Make sure to deduct TDS.

Step 6: If the tax due exceeds ₹10,000, you need to pay advance tax as per the due dates mentioned above.

GST for Freelancers

If you are a freelancer providing services, a standard rate of 18% GST is applicable to most services and so, you are obligated to collect 18% GST from your clients.

Let’s understand this using an example. If your total bill to a client amounts to ₹1,00,000, the GST rate being 18%, the GST amount would be ₹18,000. So, you’ll have to invoice your client for ₹1,18,000, with Rs. 18,000 being the GST collected from the client. You must remit this GST to the government.

When is GST Registration Mandatory for Freelancers

Every freelancer is considered a service provider. Being a service provider, a freelancer may have to get a GST registration in the following situations:

• Turnover above ₹20 lakh: Most states require freelancers to get a GST registration if the annual turnover exceeds ₹20 lakh.
• Turnover above ₹10 lakh: A few states in the north-east have a lower threshold of ₹10 lakh.
• Online Information and Database Access and Retrieval (OIDAR) services: If you are a freelancer providing OIDAR services, then you must register under GST regardless of your turnover.

But before you rush to get a GST registration, consider the following points as well:

• If your annual turnover as a freelancer is below ₹50 lakh, then you can opt for the composition scheme, which simplifies GST compliance. This scheme offers a fixed GST rate and reduces the filing requirements.
• The GST Act does not specify any threshold limit for the export of services, which means that if you are a freelancer who exports services outside India, then you have to mandatorily register for GST, irrespective of the value of the service.

Which Accounting Method is Right for Freelancers?

As a freelancer, you have the option to choose between an accrual basis of accounting and a cash basis of accounting. Let’s go through both of them so that you can understand which one is right for you.

Accrual Basis of Accounting

Under the accrual basis of accounting, your income is accounted for or booked when your right to receive arises. Similarly, your expenses are accounted for or booked when your obligation to pay arises. Under this method of accounting, the tax liability arises when income is booked. So, the tax may become payable even when you haven’t actually received the income. 

You can follow this approach for all heads of income, mandatorily for heads like salary, house property, and capital gains.

Cash Basis of Accounting

Under the cash basis of accounting, you book your income when you actually receive it, and your expenses when you actually pay them. Here, the tax liability arises in the year income is received. So, you need to pay tax only when you have received the income in your hands. This approach is permitted only for profits and losses from business or profession and income from other sources. 

Generally, it makes more sense for a freelancer to use the accrual basis of accounting method except if your income receipts are irregular, uncertain, or unpredictable. 

Need help with your tax filings as a freelancer?

Our team of Chartered Accountants is always here to help you with answers to all your queries and your tax compliances. Reach out to us today for a consultation on your tax liabilities!