Freelancers can claim tax deductions on a number of expenses ranging from travel to office supplies, property rent, meal and hospitality, etc. There is a specific formula for calculating the taxable income for freelancers.
According to Income Tax law of India, any income earned through employment or in the form of freelance assignments is liable for tax. The law basically states that any work that requires a skill —whether manual and intellectual—and the money earned through those means will be taxed under ‘Profits and Gains of Business and Profession’.
What exactly constitutes as a freelancer income?
Based on the Income Tax Act, the income you earn is basically the sum of all receipts you receive from doing any form of work for your clients. These receipts count irrespective of where your clients hail from—domestic or international—and the payments they make towards receiving the service. To count the sum received, you will need to all the bank transaction amount you have received from them over a period of time. For tax purposes, you will need to show the total sum received over a financial year.
What is an expense for a freelancer?
To figure out what constitutes as an expense for a freelancer, there are a number of conditions to be met. These are:
- The expense should be directly proportional to the amount spent on carrying out a particular assignment.
- The expense should be incurred over the course of a tax year.
- The expense doesn’t involve any capital and personal expenditures carried out by the freelancer.
- The expense is not incurred by breaking the law and by committing any criminal offence.
What are the expenses a freelancer can claim deductions against?
Now that we have understood what is considered an expense for a freelancer, let’s take a look at the ones that he/she can claim tax deductions against. According to the law, there are a number of things that can be claimed for deductions, all of which are listed below.
- Expenses incurred on travel
Any expenses a freelancer incur on travel, i.e., to meet their clients within the country or elsewhere is eligible for deduction.
- Expenses for office and office supplies
Expenses such as the ones incurred towards paying telephone bills, internet bills, office supplies, and printing documents and the like.
- Cost of Depreciation
Depreciation of any freelancer assets can also be claimed for deduction under the Income Tax Act. The rate of depreciation, however, depends on the schedule published by the tax authority - a schedule in this changes changes every year to keep the rates in line with inflation.
Let’s take a laptop for example: A freelancer buys a laptop worth Rs.1,20,000 and it depreciates at a rate of 33.33% per year. This means that the gadget depreciation at a rate of Rs.40,000 per year, the freelancer can carry on the deduction on the laptop for a maximum of three years till the tax on the total cost of the device is recouped.
[Note: The percentage mentioned above is only used as an example. Actual rates depends on the tax schedule provided by the government during the union budget each year.]
- Property rent:
Any rent paid for a particular property where a freelancer carries out his/her work is eligible for deduction. Also, cost of repairs for the said property and any belongings such as electronics and the like will be eligible for deduction as well.
- Hospitality and meal expenses:
Let’s say for instance, a freelancer invites a client to a lunch with a view to gain and retain business and pays the bill for the same. Such expenses can be tax deductible.
- Other expenses
Any expense you incur when paying local taxes and insurance for the business will also be eligible for deduction. Apart from this, any software purchases to further the business can also be used for tax deduction.
What is the taxable income for a freelancer?
Taxable income depends on the earning and the bracket each person comes under and is calculated with the following formula.
Total Tax Payable = Gross Taxable Income - Any deductions
Freelancers are also allowed to claimed deductions under Section 80C of the Income Tax Act to the tune of up to Rs.1,50,000, provided that they invest certain amount for savings purposes.
Basically, every freelancer has to pay taxes every quarter if their liability exceeds Rs.10,000 for a particular financial year. This in Income Tax lingo is known as Advance Tax.
How can you calculate Advance Tax?
Calculation of Advance Tax is relatively simple. Here is a step-by-step process to follow to make calculating your taxes easier.
- Gather all your receipts and calculate your total earnings over a financial year.
- Minus any expenses you have incurred when making your earnings. This typically includes your internet bills, travel expenses, and other such things which are listed in the expense section above.
- Follow this up by adding any other income you are receiving from savings accounts and properties.
- Check your total income against the tax slabs and calculate the tax you are required to pay.
Below is a tabular column which lists out the due date for paying advance tax.
|Due Date||Percentage of tax to be paid|
|Before 15th September||30% of the total tax payable|
|Before 15th December||60% of the total tax payable|
|Before 15th March||100% of the total tax payable|
Basic FAQs on Income Tax Filing for freelancers
- Which form do I have to use to file Income Tax?
Freelancers are required to use ITR Form IV to file their taxes.
- When am i not eligible to pay taxes?
A freelancer need not pay taxes if and only if their tax liability does not exceed more than Rs.10,000 for a financial year.
- Are there any penalties for non-payment of advance taxes?
Yes. According to the Income Tax Act, every unpaid tax racks up interest to the tune decided upon by the authority.
All in all, filing income tax returns is highly essential if you want to avoid being targeted by the law even more so for freelancers as they have to initiate the entire filing process all on their own. This brief guide will equip you with all the basic knowledge you are required to have.