Businessmen and professionals in India will be required to file their income tax every financial year. Even though it is not compulsory for entrepreneurs to register their respective organisations, they are obligated to file their income tax returns.
Among the primary questions asked by most people who start their own business is if they should incorporate a company. It is not mandatory for businesses to register as companies. However, since the incorporation of companies comes with its advantages and disadvantages, most freelancers prefer to work solo, and their work is also managed effectively, thereby making them the sole proprietors of their ‘business’.
Starting a company will mean that compliance work goes up, but continuing to work as a freelancer has no formalities. The fees for your services can be received in your bank account. Moreover, a separate IT return will not be required for your ‘business’ as your IT return shall include the income you have earned from business/profession.
India-based clients are mandated by domestic laws to subtract TDS from the income they pay a freelancer. The credit of such a TDS can be taken against your overall tax liability. In case excess TDS is subtracted, a refund can be claimed, or additional dues, if any, can be paid. Generally, the rate at which TDS is subtracted for freelancers is 10%.
Freelancers in India who earn an income through clients based out of the country either receive their money via direct credit to their bank account, or via PayPal. These payments are usually received by freelancers without any TDS. The laws in certain countries mandate clients to deduct tax at source, and in case you have one of these clients, you will be allowed to take credit on such payments. Moreover, your income will not be taxed twice thanks to the Double Tax Avoidance Agreement (DTAA) – a contract India has with numerous countries. In case TDS has not been subtracted, the receipts will have to be included in your overall income, and the tax rate applicable to them will have to be paid.
One of the few challenges faced by freelancers in India includes raising invoices, making advance tax payments, and filing their returns. The easiest way to stay on top of your books is to store each and every receipt and bank statement on Google Drive. A separate folder can be maintained on the drive for this purpose. You can also visit the website of the Income Tax Department and open an account. Doing so will keep you aware of how much money is deducted by your clients as TDS. It will also tell you about your tax liability, thereby making it easier for you at the time of filing returns.
Calculation of Freelance Income
To calculate the income you have earned from your freelance projects, your bank account statements can be referred to, and each and every payment that you have received from your clients can be added to determine how much you have earned.
Advance tax should be paid in the final month of every quarter in case your overall tax liability is over Rs.10,000. Your advance tax can be calculated by adding the amount on every invoice you have received from the start of a financial year. Future payments expected until the end of the financial year will also have to be included to arrive at your taxable income. Any investments you make over the course of a financial year, or the expenses you incur on your business, will have to be deducted.
Here are the deadlines for the payment of advance tax (AT):
|Last Date to Pay Tax||Tax Payable|
|On or prior to June 15||15% of AT|
|On or prior to September 15||45% of AT|
|On or prior to December 15||75% of AT|
|On or prior to March 15||100% of AT|
How To Save Tax When Freelancing
Freelancers can save tax by making claims for expenses incurred on their business. Expenses such as phone bills, travelling expenses, internet bills, conveyance, etc. can all be claimed as business-related expenses. All the other deductions that are claimed by salaried people under Section 80 of the Income Tax Act can also be claimed by freelancers. Just make sure that all the bills are maintained carefully so that they can be furnished as proofs for deductions.
Freelancers can claim deductions on investments too, under Section 80C of the Income Tax Act. Buying an LIC policy, or investing funds in equity-linked savings schemes, or having a PPF account, etc. all qualify for tax deductions. However, the maximum amount that can be claimed as deduction under Section 80C of the Income Tax Act is limited to Rs.1.5 lakh. Even health insurance premiums can be claimed as a deduction under Section 80D. Any donations you make can also be claimed as deductions under Section 80G of the Income Tax Act.