Income tax calculations for freelancers is a little different for salaried individuals. Their tax calculations are generally based on the calculation of profits after deducting expenses. Freelancers have to file taxes according to the advance tax payment system where they have to calculate their expected income during the year and file taxes in instalments as prescribed by the Income Tax department.

However, all expenses cannot be deducted. Those expenses which have been carried out for personal purposes are explicitly invalid for deductions. For instance, phone bills or meals expenditure for personal reasons are invalid. In the case of phone bills, if the phone has been used for business as well as personal purposes, only the proportionate business expenditure will be allowed for deduction.

Similarly, money paid to relatives in exchange for products and services which aren’t crucial to the business cannot be deducted. For instance, if someone rents a house from their sister and pays more than market rent to avail higher deduction, such an expense can’t be deducted as an expense.

Other expenses that are barred from being deducted include:

  • Payment made to relatives:
    • Having more than 20% stake in your business
    • When the market value of the service is different from the payment made
    • When your professional needs don’t depend on the product/service
  • If a payment of more than 10,000 is paid in cash for an expense, it cannot be claimed as a deduction

Imagine you were a freelance writer who rented premises from your brother for your work but paid a rent of ₹20,000 every month in cash. In this case, your rent payments are allowed to be deducted, since they are crucial expense for your business. However, since you have paid in cash, you won’t be allowed to avail such deductions. In this situation, if you go ahead and use this rent as a deduction, the IT department could issue a notice or penalty or both for not calculating taxes honestly.

What can be claimed

The Income Tax Department allows freelancers to deduct expenses carried out during the course of their business while calculating their net profit. For instance, expenses such as the following are allowed:

    • Rent of property
    • Repairs undertaken
    • Depreciation on fixed assets
    • Office expenses
    • Travel expenses