Income Tax Implications for A Freelancer in India

Indian Freelancers

Income Tax Implications

Unlike salaried professionals, tax implications are often a Gray area for those that are self-employed. Whether you’re a freelancer, small business owner or consultant, you’ll have to suit various tax-related formalities and implications.

Here are some tips that could help with understanding your freelance tax implications:

Compulsory Maintenance Books of Accounts

If your freelance profession falls into any of the subsequent categories like—

Information Technology

Company Secretary

Film Artist

Authorized Representative

Interior Decoration

Technical Consultancy

Medical

Legal

Accountancy

and your gross receipts exceed Rs 150,000 in any of the three instantly preceding years or in that particular year. Then you will need to maintain books of accounts.

If your freelance career doesn’t fall under any of the mentioned categories. Then you’d have to maintain books of accounts as long as your income exceeds Rs 250,000 in a particular year or the 3 preceding years.

You can pick between two methods: cash basis or accrual basis. The main difference between the 2 is that in accounting you’ll have to pay tax only if the income is with you.

Whereas on an accrual basis, tax liability arises when income is booked. In terms, in accrual accounting, revenue is booked once you raise an invoice. While in cash accounting, revenue is calculated when payment is received.

Within Indian Law a person running a business where he/she is the sole owner is termed as a Sole Proprietor, an equivalent applies with a Freelancer. A person earning on his own is advised a Sole Proprietor and needs to file income tax returns using the ITR-4 return form. If you have any other source of income (maybe your full-time job) you need to include that as well while filing your income tax return.

Filing your IT Returns

Income tax returns will have to be filed by filling up the ITR-4 form. You will be able to determine the tax slab you belong to and calculate your tax using the calculator on the ITR website. Keep in mind that you will be taxed on your net income. Make sure that you simply apply all applicable deductions before you reach your taxable income. As a private, you’ll claim the Section 80 deductions that are available to your salaried counterparts. As a freelancer in India, you’ll also claim the deductions available to business owners. 

What is TDS and is it Applicable just in case of Freelance Work?

TDS is Tax Deducted at Source; The Government of India has built regulations by which a company paying an individual or another company for services offered to deduct tax at source. But just in case someone deducts tax at source they need to supply a Form 16 to the person whose tax has been deducted. You can then use this TDS amount while filing your Income Tax Return and look for a refund in case your earning for the year doesn’t exceed 2 lakhs.

Advance Tax

Advance tax is calculated by estimating the present year income then applying tax rates thereon. Tax deducted at source (TDS) / Tax Collected at source (TCS) and Minimum Alternate Tax (MAT) credit shall be deducted to reach Advance liabilities.

Presumptive Taxation

Section 44ADA of tax Act, 1961: Profits and Gains of execs on Presumptive Basis

  1. This section is applicable if Gross Receipts of resident assessed (who is engaged in profession as per section 44AA) is up to Rs. 50 lakhs.
  2.  As per the provisions of 44ADA section PGBP income will be 50% of Gross Receipts. Income tax will be calculated on the 50% income on the basis of slab rates.
  3. Deduction of business expenses shall not be allowed as it is assumed that all the deductions are included as only 50% of the total gross receipts are taken for tax purposes.
  4.  There is no need of maintaining Books of Accounts as per section 44AA and get it audited as per section 44AB of the assessed declared income on Presumptive basis.
  5.  However, if the assessed declared income is lower than 50% but its Net Taxable Income is more than basic exemption limit then such assessed is required to maintain Books of Accounts and get it audited.

Goods and Services Tax (GST)

If your turnover exceeds Rs. 20 lakhs (or Rs.10 lakh for north eastern states), you’ll have to seek GST registration. Since GST registration is state-wise, you’d have to obtain separate registration for every state. To understand more about this tax, read another blog on Simplest guide to GST for freelancers in India

TDS and Refund

Under certain conditions, you’ll save even more by claiming back the TDS that’s deducted by clients. 

Once you get used to it, freelance and taxes do go hand in hand!

Read Is Freelance Income Taxable in India

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