Income Tax for Freelancers

Freelancing has emerged over the past few years as a significant source of income for several taxpayers across India, especially for the younger generation. The significant advantage that the freelance sector has is the benefit of earning regardless of an individual's age. With the evolution of technology and a plethora of opportunities, various talented freelancers across the country have chosen to make a living from their comfortable space. The term "freelance" generally refers to an individual who is self-employed. This includes people who are in the medical/ legal/ engineering fields, and also bloggers, consultants, photographers, tutors, and interior and fashion designers. The present article explains the concept of Income Tax for Freelancers in India.

Source of Income

With the advancement of technology and the power of the internet and the web, freelancing has become an attractive avenue to earn for those who wish to work part-time or otherwise. A majority of freelancers and bloggers who are accessible online, earn their incomes through the following methods:

1. 1. Affiliated sales
  2. Advertisements from various avenues such as Google AdSense
  3. By offering services related to online content writing, search engine optimisation, web designing and development, blog consultancy and other related services

Freelancers earn revenue through the specific assignments they take up for a particular term. They get paid for their work upon submission and completion. Freelancers are not an employee of the company they work for nor are on the company's payroll. Hence, the associated benefits such as Provident Fund formulated by the Company Act would not be granted to freelancers.
Freelancers are generally not required to come to a workspace such as an office and have the advantage of completing work at leisure but before the pre-agreed deadline. According to the income tax laws in India, any revenue generated by an individual by implementing their intellectual or manual skills is considered an income from a profession.
The incomes earned by a taxpayer are taxable under the head of "Profits and Gains from Business or Profession". An individual's gross income would be the total of all the invoices that the individual has raised for the services rendered by them. The freelancer's bank account statement stands as a document to verify the invoices raised for the professional services they carried out.

Expenses for a Freelancer

The conditions mentioned in the Income Tax Act are required to be considered to understand the expenses for a freelancer. They are as follows:

The expenses must be directly proportional to the amount that is spent on executing a particular task.
The expenses must be incurred throughout the financial year.
The expenses should not involve any capital or personal expenditures that the freelancer incurred.
The expenses should not be garnered by breaking any law nor by committing a criminal offence of any kind.

Deductions in Freelancing Income

Certain expenses incur while a freelancer does the work that they have taken up. These expenses may be deducted from their income. However, these expenses must be directly related to the work that they carry out. These expenses may come in any form starting from office furniture to cab fares to visit clients. The specific conditions that have to be fulfilled to claim these expenses as a reduction in the revenue generated by a freelancer have been mentioned above. Below are the expenses that may be claimed as a deduction against a freelancer's income.

Rent of the Property

If a freelancer has paid any rent towards a specific property to carry out their work is eligible for a deduction. This would also include any repairs for the property and any object such as electronics such as laptops, printers, equipment would be considered for a deduction as well.

Travelling Expenses

All expenses incurred during the travel of a freelancer for work-related purposes; for example, to meet a client within the country or anywhere, could be included as a deduction.

Office Expenses

Expenses such as telephone bills, internet bills, office supplies, printing documents and much more could be included as a deduction.

Cost of Depreciation

When a freelancer purchases a capital asset, the benefit of the asset is generally expected to last for more than a year. Assets such as these are capitalized and not charged as an expense when they are purchased initially. However, a small portion of its cost is expensed every year and is permitted to be deducted as an expense from the freelancer's income. This expense that is charged yearly is known as depreciation. Under the Income Tax Act, amortization of any of the freelancer's assets may be claimed for a deduction. However, the rate of depreciation would depend on the schedule published by the concerned tax authority. A schedule is issued to keep the prices in line with inflation with the changes occurring every year. It should be noted that the type of assets, depreciation methods and standards of depreciation that is to be charged would be laid down by the Income Tax Act.

Hospitality Expenses

These are the expenses incurred by a freelancer when they invite a client over for a meal to discuss the work or to retain the business. These expenses can be considered as tax deductible.

Other Expenses

Any expenses that a freelancer incurs while paying local taxes and the insurance for their business can also be counted as eligible for deduction. Software purchases to be used in the business for its development could also be included as a reduction in taxes.

Exceptions in Deductions

Although many expenses can be counted as deductions, there are a few that cannot be included according to the Income Tax Act. The inadmissible expenses are as follows:

Any Income Tax paid by the freelancer.
Any penalty, interest or fines accumulated for delayed payment or non-payment of Income Tax.
Any expense that is above the value of INR 10,000 in cash would not be considered for a deduction.

Moreover, any payments made to a relative would not be permitted for a deduction under the following circumstances.

When the freelancer has received any goods, facility or services.
If a payment has been made to a relative or to an individual who holds a significant interest in the freelancer's business. A relative would include a spouse or any lineal ascendant or descendant of the freelancer or the spouse. Considerable investment would be anything more than twenty per cent or more in equity or profits of the business.
If the payment is not of a fair market value of the rendered goods, facility or service.
If the payment is not a legitimate requirement for the freelancer's work.
If incurring the payment brings more benefit to the freelancer.

Books of Accounts

Freelancers commonly have the query of when they should account for their income. There are majorly two kinds of accounting methods that is significantly used by freelancers to determine their income. They are as follows.

Cash Basis of Accounting
Accrual Basis of Accounting; also known as Mercantile Basis.

Using a cash basis of accounting may appear to reduce a freelancer's tax liability. However, it does not make an actual reduction but may only postpone the tax outgo. Once an accounting method is selected by the freelancer, they are expected to comply with that certain method regularly. Freelancers are not permitted to switch between accounting methods to save or avoid the payment of taxes. The Accrual Basis is commonly chosen unless the invoices are irregular, unpredictable or uncertain. Therefore, according to Section 44AA and Rule 6F of the Income Tax Act, the books of account has to be maintained by a freelancer for income tax purposes. It should be noted whichever method a freelancer opts for will have to be followed for every client, all expenses and all revenues.

Cash Basis of Accounting

For a Cash Basis of Accounting, freelancers are to follow the points mentioned below.

Income has to be booked when it is actually and fully received.
Expenses are to be booked when they are paid.
Tax liability would only arise in the year income is received. Therefore, freelancers are only required to pay tax when they receive their income.
Profits and gains from the business and profession and Income from Other Sources are only permitted.

Accrual Basis of Accounting/ Mercantile Basis

For an Accrual Basis of Accounting, freelancers are to follow the points mentioned below.

Income has to be accounted for when the freelancer has the right to receive.
Expenses are to be booked when the obligation to pay has arisen.
Tax liability arises when the income is accounted. Therefore, freelancers may be required to pay tax even when their income has not been received yet.
This accounting approach may be followed for all the income heads specifically for Income of Salaries, Capital Gains and House Property.

Total Taxable Income

A freelancer may reduce their tax outgo by taking advantage of the deductions under Section 80 of the Income Tax Act. It offers certain tax reliefs on specific expenses and motivates the taxpayer by giving deductions on investments in financials projects.

Net Taxable Income = Gross Taxable Income – Deductions

A freelancer may reduce their taxable income by upto INR 1.5 Lakhs by claiming a deduction for the amount that is invested under this section. If a freelancer is below the age of 60 and their Net Taxable Income is above INR 2.5 Lakhs, they are liable to pay tax for the revenue generated.

Tax Payable as a Freelancer

If the Income Tax liability for freelancers exceeds INR 10,000 during a financial year, they are liable to pay taxes for every quarter of the year. This is commonly called as Advance Tax.

Calculating Advance Tax

The steps below have to be followed by freelancers to calculate the advance tax.

Sum up all the invoices and receipts to determine the freelancer's total income.
Reduce the expenses that are directly related to the freelancer's work.
Include Income from Other Sources such as a savings account.
Learn about the tax slab that the freelancer belongs to and calculate the tax due.
Deduct the appropriate Tax Deducted at Source (TDS).
If the tax due is more than the value of INR 10,000, the freelancer is required to pay an advance tax by the due dates that are mentioned below.

Advance Tax Due Dates

The due dates to pay advance tax by freelancers have been given below:

Date	Percentage of Advance Tax to be paid
On or before the 15^th of June	15% of the advance tax or more
On or before the 15^th of September	Not less than 45% of the advance tax as reduced by the tax paid in the last instalment.
On or before the 15^th of December	Not less than 75% of the advance tax as reduced by the tax paid till the last instalment.
On or before the 15^th of March	The whole amount (100%) of the advance tax as reduced by the tax paid till the last instalment.

Latest Update on the Pay Later Option for Income Tax Filing

The Income Tax e-filing portal has recently rolled out a 'Pay Later' option, allowing you to complete your tax filing process before making any tax payments. You can pay taxes after you are done filing. For additional information, please refer to our guide – Pay later option for the Income tax return filing.

Penalties

A freelancer is liable to pay interests mentioned under Section 234B and Section 234C when they fail to pay advance tax. To avoid the Interest Penalties under Section 234B and Section 234C, the following has to be ensured in considering the Income Tax liability for Freelancers.

Advance Tax has to be paid if the freelancer's tax liability exceeds INR 10,000 in a year.
The total Advance Tax payments have to be made before the 31st of March in a year; 100% of the total tax payable.

When a freelancer fails to pay Advance Tax according to the dates set by the Income Tax Department, the penalties under Section 234B will apply. On the other hand, the penalties under Section 234C would be applicable when the freelancer fails to pay the interest accumulated according to the set due dates.