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TAXES IN INDIA FOR FREELANCERS: GUIDE TO PLAN AND SAVE TAXES STEP BY STEP

In India and all over the world number of freelancers is increasing every second. Currently in India there are 16 million approx. freelancers in several fields. Technology, opportunities, innovations in working methods, remote location working methods have contributed positively in freelancing work.  Like any other income earners Freelancers are also liable to comply with the income tax laws. Lets us understand the most important aspects here, we will cover from basic things and step by step help understand the taxation system, how we plan and save taxes.

WHO IS FREELANCER?

A freelancer is a self-employed person who works for clients on a project/assignment-basis or on a retainer for providing a specific pre-decided set of services. Mostly the fields in India where freelancing is popular include writing, accounting, photography, web development, architecture, digital marketing among others. 

WHAT IS INCOME IN FREELANCING?

Any money you receive as a freelancer constitutes income. Whether the income is from India or from outside India, it does not matter, except for some difference in GST rules (we will explain this in later part). Your bank statement is relevant document which is used to check your income from freelancing during the year.

Freelancers can be anyone from the following: Blogger, Vlogger, Digital Marketer, Social Media Manager, Consultant from any field, Web Developer, Designer, Photographer, Teacher, Makeup artist, etc

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IS GST APPLICABLE TO FREELANCERS?

Freelancers whose revenue is 20 lac or more during one Financial year, needs to register for GST mandatorily. The freelancers whose revenue is less than 20 lac and those who provide services only within their state are not required to register for GST. The percentage of GST for a freelancer depends on the kind of service that the freelancer provides. If there is no rate specified then the freelancer is liable for 18% GST. In certain cases freelancers can take GST on a voluntarily basis. Remember that once you register for GST, Filing GST returns is mandatory.

WHAT IS GENERAL INCOME TAX RULES FOR FREELANCER?

As per the Income Tax Act, whatever income you earn as a freelancer in India is counted under the head ‘Profits and Gains of Business or Profession’. The income tax slabs for freelancers are the same as that for salaried individuals. The higher your income, the more the tax. The same is calculated as below. Income derived is your Total receipt less the expenses (next point is about what expenses are)

Income tax slabs under new tax regime (Applicable from FY2020-21)

INCOMETAX
RS. 2.5 LACSNIL
RS. 2.5-5 LACS5%
RS. 5-7 LACS10%
RS. 7.5-10 LACS15%
RS. 10-12.5 LACS20%
RS. 12.5-15 LACS25%
RS. 15 LACS AND ABOVE30%

WHAT ARE THE EXPENSES THAT FREELANCERS CAN CLAIM IN ORDER TO REDUCE TAX LIABILITY?

Certain expenses can be deducted from your gross taxable income to reduce your tax outgo. The Income Tax Law allows you to claim these expenses as you incur these for the purpose of acquiring and delivering work in freelancing

Only those expenses that are incurred in business of acquiring and delivering freelance assignment can be shown as deductions. 

Example:

  • Travel expenses , Lunch & hospitality expenses
  • Expenses of office supplies, stationery, phone, Internet, among others
  • Cost of depreciation of assets such as a laptop, camera,  and other devices
  • Rent on property that is used to carry out for the freelance assignment

Payment to freelance consultants for the assignment

WHAT IS PRESUMPTIVE TAXATION RULE WHICH HELPS FREELANCER PLAN AND SAVE TAXES?

This is applicable if your Freelancing receipts during the year is upto Rs. 50 Lacs. This method relieves you of bookkeeping. Under this method, it is presumed that half of your gross receipts is your income therefore by keeping the presumed figure at 50%. This 50% of receipts is treated as income from business and profession and taxes are calculated accordingly. Only the following services are eligible for presumptive taxation:

  • Interior Decorators
  • Technical consulting
  • Accounting
  • Engineering
  • Architecture
  • Legal
  • Medical
  • Other professionals: Movie artist includes producer, director actor, music director, cameraman, dance director, singer, lyricist, story writer, screenplay/dialogue writer and costume designer
  • Any other notified professionals by income tax authority

WHAT ABOUT TDS DEDUCTION FOR FREELANCERS?

 Clients deduct TDS from the payment made to the freelancers. Freelancers can claim such deducted              TDS when filing ITR (Income Tax Returns). Freelancers can get the information about TDS deducted from Form 26AS or take help of ca near you or any tax expert near you.

IS THERE A REQUIREMENT OF SEPARATE AUDIT FOR FREELANCERS?

If Gross receipts from your freelancing business is more than Rs. 50 Lacs in a year- you are supposed to get the books audited from a chartered Accountant. This is called income tax audit.

IS FOREIGN INCOME TAXABLE FOR FREELACERS?

Yes. If you’re a resident Indian, the income you’ve earned from outside India  will  be included to your total income.

Just like TDS in India, the country laws of the client you work for may require your client to deduct tds when they pay you. This could mean that your income is taxed at source and also in the country of residence. To prevent this, India has entered into Double Tax Avoidance Agreements (DTAAs) with several countries. The rate differs for each country, you can check the relevant DTAA of the country where your income was earned.

You can claim tax relief either through exemption or tax credit. The mandatory documentation for this is a tax residency certificate. Under the tax credit method, since you have been taxed in both countries, you would get a foreign tax credit for taxes paid in the source country. Your professional can assist you to file and claim refund of taxes deducted in another country.

WHAT ARE OTHER THINGS TO TAKE CARE OF IN ORDER TO COMPLY WITH THE TAX LAW IN INDIA?

  1. In cases where the total tax payable amount is Rs 10,000 or more, the freelancer is expected to pay taxes every quarter. This tax paid every quarter is an advance tax.

Due date for paying advance tax?

  • On or before 15th June, 15% or more
  • On or before 15th September, 45% or more depending on the amount of tax paid in the last instalment
  • On or before 15th December, 75% or more depending on the amount of tax paid in the last instalment
  • On or before 15th March, the entire 100%
  1. Filing of income tax returns within due date
  2. Claiming of TDS deducted at the time of filing Income tax return
  3. Register for GST if your receipts has reached threshold limit
  4. Go for income tax Audit if your receipts has reached threshold limit
  5. If your business grows rapidly- talk to consultant about restructuring your business such as should you now go for entity incorporation etc.

Got any questions? Or need  tax advice or a call from expert? Drop an email to info@taxvic.com

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