Tax Implications on Freelancers

FREELANCING INCOME

A freelancer is a person who is self-employed for a specific project on a timely basis, the income of which is taxed like just like other sources of income, upon such completion of work. The only difference between a freelancer and an employee of the company is the recognition, benefits, and perks that are offered to an employee are not provided to a freelancer, as per the Companies Act.

tax implication for freelancerFreelancer also needs to pay the tax in India. As per income tax norms, any income generated where the person displays his/her intellectual or manual skills is considered as Profits from business or profession. Many people don’t like doing a fixed-time job and love the flexibility in their working hours. This comfort comes with a cost, whatever the reason is freelancers are also liable to pay the taxes to the government for the income they earn, same as business or salary people as per the income tax act.

TAX COMPLIANCES FOR A FREELANCER

Applicability of GST

Freelancers are also under the preview of GST for all the services rendered by them, whereby with 18% of GST applicability. These are also categorized as-

  • When the services are provided up to Rs 20 lakhs in a financial year: The applicant is not required to get registration under GST, whether the services are intra-state, inter-state, or even when it is export of services, thereby making him not liable to pay GST.
  • When the services are provided for more than Rs 20 lakhs in a financial year: Here 2 conditions prevail-
    (a)Export of Services: Where the services are made outside India, regardless of the value for which it is provided, registration is not required for such services.
    (b)Services provided outside India as well as in India: The registration is mandatory and the GST will be applicable for the services that are being provided within India. For the services provided outside India GST is not required to pay GST if, Letter of Undertaking (LUT) is filed. Where such LUT is not pre-filed, then GST has to be paid for which a refund can be claimed later on through refund forms.

A freelancer can choose to get registration under GST to avail of the Input Tax Credit on the services provided.

Income Tax on Freelancer

In accordance with the Income Tax Act[1], any income that is earned by displaying your intellectual or manual skills is income from a profession. This income shall be taxed under the head “Income from Business and Profession” and the gross income at the end would be upon all the receipts carried out in the course of a profession.

  • The gross receipts are more than 50 lakhs: The complete books of accounts are maintained and are required to be properly audited from time to time.
  • The gross receipts are less than 50 lakhs: The are 2 ways for filing such a return for a freelancer-
    (a) A freelancer can choose the Presumptive Taxation Scheme under section 44 ADA of the Income Tax Act, 1961, where the tax is paid only on half of the annual gross income.
    (b) When a freelancer is engaged in a profession not covered under section 44AA of the Income Tax Act, 1961, the proper books of accounts are maintained where the profit from freelancing exceeds Rs 1,20,000 or turnover exceeds Rs 10,00,000 in any of the previous 3 years, the limit of which has been raised from F.Y. 2017-18 to 1,50,000 and 25,00,000 respectively.

Advance Tax

The tax is paid by the freelancer every quarter when his total tax payable goes to Rs 10,000 or more. All the receipts are added with all the incomes he earns, whereby subtracting the expenses on freelancing, and the amount of tax is calculated on the basis of the tax slabs. TDS @ 10% is deductible from his income, further to which the freelancers are eligible to claim their TDS refunds, just like other salaried persons.

Penalties in Advance Tax

A freelancer can face penalties under section 234B and 234C, not complying to pay advance tax on time[2]. The penalties under section 234B are applicable when the Advance Tax is not paid by the freelancer in accordance with the due dates set by Income Tax Department, and the penalties under section 234C are when the interest accumulated with respect to set due dates are failed to be complied with. The applicant can avoid such penalties by-

  • Paying the advance tax when the freelancer’s tax liability exceeds Rs 10,000 in a year.
  • Paying 100% of the total advance tax payments before 31st March, in a year.

Income Tax Return for freelancers

Even the freelancers are required to file the ITR, stating the statements of freelancer’s taxes. It can be a more difficult tax for them to file their ITR, as their clients are not always fixed or having a particular number of clients. They are required to file ITR-4 under the head “Business and Profession”.

There are a number of benefits attached to the filing of ITR-4 by the freelancer’s one such major benefit is, it works as an important record as Form 16 is not required to be filled by the freelancers if the ITR is filed. There are other benefits too like availing home, vehicle, or personal loans from banks, Visa processing, for carrying forward losses, buying a high life cover.

TAX DEDUCTIONS FOR FREELANCERS

There are few deductions under which the freelancers can claim the expenses and save the taxes which they incurred while completing their work and are in furtherance of business[3].

  • The deductions under the Income Tax Act under section 80C, offering tax reliefs on certain expenses, encouraging them to save more in the future. Such deductions are subtracted from the gross taxable income of the applicant, making it the Net Taxable Income.
  • There are few expenses that can be claimed at the time of freelancing of income, which is solely for the purpose of the work in furtherance of the business, incurred during the tax year. It should be either capital expenditure or a personal expenditure, not prohibited by the law.
  • Then there are other expenses that can be claimed as deductions namely, rent of the property, travel expenses, office expenses, cost of depreciation, hospitality, and other expenses in furtherance of the business or work of freelancers.

Exceptions in Deductions

Despite many expenses given as deductions to be claimed, there are few which cannot be in any situation be said or claimed as an expense to be deduced as deductions in accordance with the Income Tax Act[4].

  • 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.
  • Any payment made to a relative.

Author: Mehak Bansal, a 4th Year student of B.Com LLB from University of Petroleum and Energy Studies (Dehradun), intern at Khurana & Khurana, Advocates and IP Attorneys. In case of any queries please contact/write back to us at aishani@khuranaandkhurana.com.

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