India is the second-fastest-growing freelance market in the world. Freelancing has seen a tremendous surge in the past 2 years as the world experienced immense uncertainty in jobs due to the pandemic. Freelancers are now being considered as the future of business.
Though freelancing has a remote-centric work scenario, it is still subject to tax rules. Let us discuss what constitutes taxable income for freelancers and what tax rules apply to freelance income.
How Do Freelancers Earn Money?
A freelancer generates his income by offering his services to multiple companies, which results in multiple revenues. In freelancing, the freelancer’s knowledge and skills are put to use to earn income. He receives a fee in return for the services he rendered as a freelancer. The total receipts earned from his multiple jobs comprise his income.
The Income Tax Act and its regulations consider freelancing as the same as owning a business or a profession. Thus, it comes under the category of “Income from business or profession”.
What is Freelancing as per Income Tax Rules?
Any income generated by an individual through the application of their manual or intellectual skills is categorized under “Profit and Gains from Business and Profession.” In the context of taxation, freelancing is treated as a business and profession. Freelancing is a form of self-employment as you are not hired by the company or placed on its payroll. Various consultants and professions like blog consultancy, software developers, content writers, web designers, tutors, fashion designers, etc. do qualify as freelancers
Taxation for Freelancers
If a freelancer’s aggregate turnover in a year is more than Rs. 20 lakhs (Rs. 10 lakhs for North Eastern and Hill states), he needs to register under GST. For most of the services, 18% is the GST rate applicable. Depending on the goods and services offered by the freelancer, the GST rate may vary.
Freelancers are required to pay income tax at the applicable slab rates and claim deductions under the head business and profession. Freelancers can also file ITR under the presumptive taxation scheme under section 44ADA. The presumptive taxation scheme allows them to pay tax on only half of the gross annual income if it does not exceed 50 lakhs.
New Regime (FY 2024-25)
| Range of Income (Rs.) | Tax Rate |
|---|---|
| Up to 3,00,000 | NIL |
| 3,00,000-7,00,000 | 5% |
| 7,00,000-10,00,000 | 10% |
| 10,00,000-12,00,000 | 15% |
| 12,00,000-15,00,000 | 20% |
| Above 15,00,000 | 30% |
Old Regime (FY 2024-25)
| Range of Income (Rs.) | Tax Rate |
|---|---|
| Up to 2,50,000 | Nil |
| 2,50,000-5,00,000 | 5% |
| 5,00,000-10,00,000 | 20% |
| Above 10,00,000 | 30% |
Exemptions or Deductions
| Section | Exemption/Deduction |
|---|---|
| Section 80 C | Exemption up to Rs. 1.5 lakhs on investment towards ELSS, ULIP, insurance, FDs, etc. |
| Section 80 CCD | Investment in central government schemes |
| Section 80 CCF | Exemption of up to Rs. 20,000 on investment in government-notified infrastructure bonds. |
| Section 80 D | The premium for health insurance |
| Section 80 DD | Exemption up to Rs. 1.5 lakhs on treatment for disabilities |
| Section 80 E | Education loan |
| Section 80 G | Donations to charitable trust & relief funds |
How to File Income Tax for Freelancers?
Step 1: Determine the total income earned during the financial year from April 1st to March 31st.
Step 2: Assess the eligible expenses and deductions that can be claimed for the given financial year.
Step 3: Choose the relevant form, either ITR-3 or ITR-4, and complete all the necessary information on the form by logging into the Income Tax e-Filing portal.
Books of Accounts for Freelancers?
- Accrual Basis of Accounting
- Cash Basis of Accounting
| Accrual Basis of Accounting | Cash Basis of Accounting |
|---|---|
| Income is booked when it gets accrued or receivable. | Income is accounted for when it is actually received |
| Expenses are accounted for when there is an obligation to pay | Expenses are booked when actually paid. |
| Tax liability takes place when income is booked | Tax liability arises in the year in which the income is received |
| Can be followed for all heads of income such as salary, capital gains, and house property | The approach can be used only for P&L from business/profession and income from other sources. |