In India, there are 15 million freelancers. According to reports, one in four freelancers in the world is Indian. Around 40% of all freelance jobs offered around the world are done by freelancers from India (1). According to industry estimates the Indian ‘freelancers’ market size is likely to grow to a whopping $20-$30 billion by 2025(1).

Who is a freelancer? Do freelancers have to pay tax?

Freelancers are the people who prefer working for themselves, mostly from home and not a registered company. They get hired to work on specific tasks for a specific duration and get paid upon the completion of their assignment.

But all of this comfort comes at a cost, and like other salaries of business professionals, freelancers also have to pay tax on whatever they earn.

Freelancer from a Tax Preview

Any income generated from a profession which involves display of intellectual or manual skills is taxable. This income comes under the “Profits and Gains of Business and Profession” head of the Income Tax Act.

The gross income of a freelancer is the sum of all receipts that s/he gets while carrying out his/her duties for the clients based in India or outside. The gross income is calculated for a given financial year, for example, from April 01, 2021 to March 31, 2022. The bank statement of a freelancer can be used as a proof for the payment received while assessing the tax liabilities of freelancers.

Applicability of Taxes and ITR Filing for Freelancers

Freelancers in India come under the purview of Income Tax and GST (Goods and Service Tax). Since freelancer also falls under the per view of GST, a freelancer would be required to get registered in the State/Union Territory (other than special category states) from where he makes taxable supplies of goods or services or both if his aggregate turnover exceeds ₹ 20 lakhs. However, if the freelancer is exclusively engaged in the supply of goods only, the threshold limit for obtaining registration is ₹ 40 lakhs.

In case of special category states (which includes Sikkim, Arunachal Pradesh, Himachal Pradesh, Uttarakhand, Assam & Meghalaya), the freelancer making taxable supplies has to obtain registration if the aggregate turnover exceed ₹ 10 lakhs (₹ 20 lakhs in case of exclusive supply of goods only). Depending on the goods and services offered by the freelancer, the GST rate may vary.

Freelancers also need to pay income tax as per the applicable rate. The following are the income tax slabs and rates for Individual (resident or non-resident) under the age of 60 years anytime during the previous year:

Tax Slab(₹) Old Tax Rates New Tax Rates

0 – 2,50,000

0%

0%

2,50,001 – 5,00,000

5%

5%

5,00,001 – 7,50,000

20%

10%

7,50,001 – 10,00,000

20%

15%

10,00,001 – 12,50,000

30%

20%

12,50,001 – 15,00,000

30%

25%

15,00,001 & above

30%

30%

Depending on which tax regime the freelancer opts for, tax deductions can be claimed.

Freelancers can make use of the Presumptive Taxation Scheme under Section 44AD or Section 44ADA of the Income Tax Act, 1961, depending on the nature of income he/she is earning. Let us learn in detail about the section and its benefits for freelancers.

How can presumptive taxation benefit freelancers?

As a relief to freelancers, the government added them to the presumptive taxation category under Section 44AD of the Income Tax Act in 2016.

In order to relieve small taxpayers with a revenue of less than ₹ 2 crores from maintaining books of accounts, Section 44AD was enacted. The presumptive income system relieves the taxpayer from the requirement to maintain the books of accounts by allowing them to assume the minimum profits at a defined rate of the entire turnover.

How to calculate tax under section 44AD?

Section 44AD is a presumptive taxation scheme under which income is estimated on the basis of 8% of turnover (or 6% in the case of digital receipts and payments) and the taxpayer is not required to maintain books of accounts.

What is Section 44ADA?

Under Section 44ADA, the following freelancing professionals qualify for presumptive taxation if their gross income for the year does not exceed ₹50 lakhs:

  • Interior decorators
  • Technical consultants
  • Engineers
  • Accountants
  • Lawyers
  • Medical practitioners
  • Architects
  • Other professionals:
    • Film artists, including a producer, actor, editor, director, art director, music director, singer, dance director, cameraman, lyricist, screenplay writer or dialogue writer, story writer, and costume designer.
    • Authorised representatives
    • Any notified professional other than these

Why is Section 44ADA suitable for freelancers?

  • Freelancers generally don’t have a lot of expenses. This scheme saves them the work of maintaining books of accounts.
  • Profits are presumptively equal to 50% of gross receipts under the presumptive taxation system.
  • Deductions under Section 80 can also be claimed over and above presumptive tax.
  • No need of maintaining books required under Section 44AA

This scheme has given impetus to the ever-growing community of freelancers in India.

Please Note:

In accordance with the Presumptive Taxation Scheme, freelancers may file income tax returns using the ITR-4 Form. Freelancers who choose not to take advantage of the Presumptive Taxation Scheme may file their taxes using the ITR-3 Form, which is used for income from a business or profession. The deadline to submit an ITR in case of non-audited taxpayer for the FY 2021–22 i.e., AY 2022–23 is July 31, 2022.

Just like income tax, freelancers also have to pay TDS too. Here's a guide to TDS for freelancers.

What are the TDS rates for freelancers?

Tax Deducted at Source (TDS) is the amount of money deducted as tax by the payer before making a payment for any service. TDS is a part of your tax obligation to the government on your income. The only difference is that it is deducted before you receive payment.

In case of professional services, TDS is applicable at a rate of 10% under Section 194J whenever a professional/ organisation pays a freelancer more than Rs 30,000 (per transaction or in total for the financial year). The deducted tax must be deposited with the government.

For instance, let us assume that you are a freelancer and have invoiced a client for ₹40,000. The client will subtract ₹4,000 (10% of your invoiced amount) and pay you the remainder of ₹36,000. The client is responsible for depositing the deducted amount with the government as Tax Deducted at Source (TDS).

Once the quarter ends, the client will provide you with Form 16A, which will state that ₹4,000 was deducted as tax from your payment. It will likewise have different detailed elements like the receipt number for the payment, the date when the sum was deposited with the government, and so on.

The freelancer can use the online facility provided by TRACES to generate form 26AS. This form lists all the TDS deductions that have been made on their income through the year. This information can be used when filing returns to ensure that you are not paying taxes on your income twice. It must be remembered that this system is linked to one’s PAN, so it is essential that the client has your PAN details and has linked the TDS to your PAN.

If your profit for the entire financial year doesn’t fall under the tax bracket, here’s what you can do:

  • Let’s say you made a total earning of ₹2.2 lakh from different customers and every one of them deducted TDS from your earnings. The total tax deducted would total ₹22,000 (10% of 2.2 lakh).
  • Let’s additionally assume that you don’t have any other source of income. Then your aggregate salary for the current financial year hasn’t crossed the tax slab of 2.5 lakh (which is tax-exempted). As a result, you won’t have to pay any taxes to the government. So what happens to the deducted tax at this point? In this case, you would need to file for a refund from the Income Tax Department.
  • Since the tax was deducted at the source without taking into account how much your total income for the year would be, you would qualify for a tax refund.
  • In this scenario, you will be able to recover the entire amount of ₹22,000 in the form of tax refund.

Let us now understand how a freelancer has to deposit tax with the government.

How is a freelancer supposed to deposit tax with the government?

Freelancers are individuals in the workforce that are self-employed and are hired by companies to work on a project-by-project basis. Due to the nature of their work, i.e., being variable in terms of volume, and as a result, having a variable income, the tax payments that are needed to be made for freelance workers is dissimilar to that of ordinary salaried workers.

Advance tax

Freelancers, self-employed workers, businessmen, and corporations are required to pay something known as an ‘advance tax’. Since income for the aforementioned list of types of workers and corporations can vary, the government collects taxes from them quarterly. The ‘advance tax’ is also known as the ‘pay-as-you-earn tax’. So how does it work for a freelance worker?

If it is found that the total tax liability that a freelancer owes for the financial year exceeds the sum of ₹10,000, then the taxpayer is required to pay off his/her due amount in 4 quarterly instalments, as follows

On or before 15th September

Not less than 45% of advance tax as reduced by the tax paid in the last instalment

On or before 15th December

Not less than 75% of advance tax as reduced by tax paid till the last instalments

On or before 15th March

The whole amount (100%) of advance tax as reduced by the tax paid till the last instalments

If the taxpayer fails to make a payment, then interest will be levied as per the provisions of Income Tax Act, 1961.

How can freelancers calculate their advance tax?

The following steps should be followed to calculate advance tax:

  • Calculate your total taxable income by adding up all of your earnings.
  • Calculate your tax liability by learning which tax bracket you fall under.
  • Any TDS deducted can be reduced from the tax liability in order to calculate remaining tax to be paid.
  • You are supposed to pay advance tax by the set deadlines if the amount is more than Rs. 10,000.

What is income tax liability for freelancers providing services outside India?

If you earn income from clients who are based overseas, you may receive the money as a direct remittance to your bank account or via such services like PayPal. Two cases are to be noted here:

  • If the money you have received was already subject to a tax deduction at source, then you will not have to charge it as taxable income. This is because of the provision of the Double Tax Avoidance Agreement (DTAA). If the receipt you get has already been treated for tax at source and then you end up paying tax in India too, it will get taxed twice. The DTAA is signed between India and 80 countries to prevent this from happening. All in all, your money has to be taxed either in the source country or in the country of residence. So, if there’s a DTAA between the two countries, you might not have to add it to taxable income if TDS was deducted in the source country.
  • In case the TDS was not deducted in the remittance, you will treat this income just like you would treat any other income you earn as a freelancer, irrespective of the geographic boundary it is being transferred from. Thus, your professional fees from the foreign client are to be treated just like any money you earn locally.

As a rule, the process involves adding up all the revenue - whether from clients in India or abroad and adjusting for expenses incurred in freelancing to arrive at the final figure of your freelance income.

Tax Deductions for Freelancers

Freelancers can also reap tax deduction benefits as individuals and business owners. As individuals, they can claim tax-saving deductions available to salaried individuals and as freelancers, they can claim deductions available to business owners. There are multiple expenses for freelancers to claim as deductions. The only requirement is that these expenses must be related and directly linked to the work they’re doing with the following conditions:

  • The expenses should only be for the purpose of freelancing work
  • Money that is spent exclusively for the purpose of the freelancing work
  • Expenses incurred during the financial year
  • Expenses should not be related to the capital expenditure of the freelancer

Expenses that Freelancers can Claim as Tax Deduction

The following expenses can be claimed by freelancers as tax deduction.

  • Property Rent - Simply put, if a freelancer rents a property for work, the rent amounts are tax-deductible. So, if you rent a desk, co-working space, or office space, you can deduct said amount from your income. If you work from your rented home, you can claim a part of the rent amount as deductions.
  • Repairs Undertaken - By agreeing to pay for repairs on a rented property, those costs can also be deducted. Even repair costs on the business properties such as laptops or printers you own are allowed deductions.
  • Depreciation of Assets - When a freelancer purchases capital assets, benefits can last for a while. As assets are used, their value depreciates. These portions of the asset value can be claimed as deductions from taxable income every year. Even vehicles used for commuting to work are assets that you can claim depreciation on. The rate and methods of depreciation vary across assets.
  • Office Expenses - Expenses you incur to do your work, such as purchasing electronics, office supplies, telecommunication bills, and transportation expenses can be claimed as deductions.
  • Expenses on Meals, Entertainment, and Hospitality - If you conduct meetings with clients, particularly taking them out for meals or outings, any money spent to that end can be claimed as deductions. The money spent must be for the sole intention of winning new business deals or maintaining existing contracts.
  • Contracting Costs - Certain projects require freelancers to enlist the services of another person or firm. Such payments made on a long-term contractual basis are also deductible.

Expenses that Freelancers CANNOT Claim as Tax Deduction

The following expenses cannot be claimed by freelancers as tax deduction:

  • 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.
  • 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.

What are the top 6 tax deductions for a freelancer?

Among the many, here are the top 6 tax deductions freelancers can opt for:

#1. Section 80C - Tax Deduction on Premiums Paid towards Life Insurance Policies - Freelancers can also claim deductions up to ₹ 1,50,000 under Section 80C of the Income Tax, if they save/invest money in a life insurance policy. It is a win-win situation for freelancers - as they not only save taxes but also cover their loved ones against unforeseen financial emergencies.

#2. Section 80D - Tax Deduction on Premiums Paid towards Health Insurance

The premium for medical insurance can be used for tax saving for freelancers. The maximum deduction that is allowed is ₹25,000, and ₹50,000 for senior citizens. An assessee can also claim deduction of ₹5,000 on Preventive Health Check for spouse, self, parents, and children. However the same is included while calculating maximum deduction of ₹25,000 or ₹50,000 as the case may be.

#3. Section 80 E - Tax Deduction on Education Loan Interest Payment

The interest on an educational loan taken for the higher education of self or relatives can be used for tax saving for freelancers. The loan should be taken from an approved charitable institution or from a financial institution. There is no higher limit for this kind of deduction. It can be availed for 8 years or until interest is fully paid off.

#4. Section 80G - Tax Deduction on Contribution Made to Approved Charitable Organisations

These are some of the popular tax-saving instruments. Contributions to specific charities and relief funds are fully tax-deductible.

#5. Section 80U - Tax Deduction on Medical Expenses of Handicap/Disabled Taxpayer

Expenses for medical treatment of a disability suffered by a freelancer or a dependent family member are eligible for tax deduction up to ₹75,000 (for 40% to 80% disability). For severe disability (higher than 80% disability), the limit is ₹1,25,000.

#6. Section 24(b) - Tax Deduction on Income from House Property

You can earn tax exemptions on your home loan interest payments as well. Under Section 24(b), interest of up to ₹2 lakhs is tax-free, provided that the construction is completed within five years of the loan term.

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What is the process of filing Income Tax Returns for freelancers?

The following is a step-by-step process:

    • Step 1 - Determine the total income for the specified fiscal year from April 1 to March 31. Loans and other debt commitments should be left out because they are not regarded as income.
    • Step 2 - Calculate your expenses of the business to obtain a tax deduction.
    • Step 3 - Choose the relevant form as given below and complete it with the necessary data.
      • Individuals who gain financial profits via a business are subject to the ITR-3. Such people could operate a business or profession and earn money from rent, capital gains, wages, pensions, and other sources.
      • ITR-4 is applicable to those who choose presumptive income schemes in accordance with Sections 44AD, ADA and 44AE of the Income Tax Act. If freelancers have business incomes as described in Sections 44AD, ADA or 44AE, as well as salaries, pensions, or any other kind of income that exceeds 50 lakhs, ITR-4 Form will be relevant. 

The forms can be downloaded from the Income Tax Department's official website, filled out offline, and then uploaded as an XML file in this IT portal. As an alternative, people can fill them out on the site and submit them after being digitally verified. 

  • Step 4 - Complete the required information, including taxable income, deductions, expenses, and paid advance tax. The ITR filing deadline in case the accounts are subject to audit is October 31st of the fiscal year. However, if the income is not being audited, they can file ITR by July 31st.