Taxation of Freelancers and Gig Economy Workers
A large portion of the workforce has moved towards entrepreneurship in recent years. This has become a trend and has accelerated during the global pandemic.
With the rise of remote working cultures, many individuals have started earning from the comfort of their own homes, leading to the growth of startups that are service-based and independent consulting.
The gig economy in India is growing rapidly. As this sector grows, it is vital to understand the tax implications. The government levies taxes on freelancers and gig workers just as it does on salaried employees and business owners. However, the tax that is levied may vary slightly.
Understanding the Gig Economy and Freelancing
- Freelancing: Instead of being employed by a single organisation, freelancers are considered self-employed. They provide services on a project or on a contract basis to various clients.
- Gig Economy: This sector consists of temporary workers who operate without a traditional employer-employee contract. Services are usually flexible and independent, unlike full-time employment.
Income Tax Liability for Freelancers
If you are a freelancer or gig worker, your income is classified as profits and gains from business or profession. In India, every individual earning more than a certain amount of money is liable to pay income tax annually. This rule applies to freelancers just as it does to salaried staff.
The New Tax Regime Slabs
Freelancers should refer to the income tax slabs under the New Tax Regime to understand their liabilities. The rates under the New Tax Regime are mentioned in the table below:
Income Tax Slab | Income Tax Rate |
0 – Rs.12,00,000 | Nil |
Rs.12,00,001 – Rs.16,00,000 | 15% |
Rs.16,00,001 – Rs.20,00,000 | 20% |
Rs.20,00,001 – Rs.24,00,000 | 25% |
More than Rs.24,00,000 | 30% |
Deductions and Expenses
One of the primary benefits of being self-employed is the ability to deduct business-related expenses from your total income, this in turn will lower your taxable income.
Claiming Expenses
Freelancers can deduct costs incurred directly for their work. These expenses must be only for business purposes.
Some of the common expenses are given below:
- Office furniture and equipment.
- Rent for office space.
- Costs for client meetings.
- Internet and telephone bills related to work.
Section 80C Deductions
Like other taxpayers, freelancers can avail themselves of deductions under Section 80C of the Income Tax Act. This allows for tax savings through investments in specific instruments such as Public Provident Funds (PPF), Life Insurance premiums, and Equity Linked Savings Schemes (ELSS).
Tax Deducted at Source (TDS)
TDS is a mechanism where tax is collected at the very source of income. For freelancers, this means clients may deduct a percentage of the payment such commission, professional fees, etc., before transferring the funds to you.
Audit Requirements
Freelancers are subject to an audit if their annual gross receipts exceed a certain limit. Currently, if your gross receipts are above Rs.50 lakh in a financial year, you may be required to get your accounts audited. If you fall below this threshold, the audit requirement may not apply, provided you declare a certain percentage of your income as profit.
GST Registration
Goods and Services Tax (GST) is another compliance area for gig workers. You must register for GST if your total receipts (turnover) exceed Rs.20 lakh in a financial year. For freelancers residing in certain northeastern states, this limit is lower, set at Rs.10 lakh.
While the freedom of the gig economy is appealing, it comes with the responsibility of managing your own taxes. The government has streamlined the process to make it easier to compute taxes and claim deductions. By understanding your tax slabs, keeping track of expenses, and monitoring your TDS through Form 26AS, you can ensure that all taxes are paid on time.
FAQs on Taxation of Freelancers and Gig Economy Workers
- Who is considered a gig worker in India?
A gig worker is someone who engages in temporary or flexible work without a traditional employer-employee contract. This includes freelancers, independent consultants, and platform-based workers.
- What is the tax-free income limit for freelancers?
Generally, income up to Rs.12,00,000 is exempt from tax under the New Tax Regime.
- Can freelancers claim expenses to reduce their tax?
Yes, freelancers can deduct work-related expenses such as office rent, internet bills, and client meeting costs from their gross income.
- What is TDS for freelancers?
TDS is a portion of your fee deducted by the client and paid to the government on your behalf.
- How can I check how much tax my clients have deducted?
You can check Form 26AS on the Income Tax Department website.
- Can freelancers save tax under Section 80C?
Yes, freelancers are eligible for deductions under Section 80C for investments in PPF, life insurance, and other approved schemes.
- When is a tax audit required for a freelancer?
An audit is generally required if your annual gross receipts from the profession exceed Rs.50 lakh.
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