Work as we know it doesn’t fall under the 9 to 5 cycle anymore.
Urban India packs more than 16 million freelancers who are changing the way we work and don’t be surprised because some experts believe that the numbers will quadruple every five years.
Blame the grains that feed this never-ending conquest of technology, which has offered us a plethora of opportunities, and one of them is the convenience to work from anywhere.
But just like every salaried individual, freelancers are also liable to pay taxes on their income. But it is slightly complicated for freelancers as they can have multiple sources of revenue.
In this article, we will try to cut the frills of income tax for freelancers, consultants, homepreneurs and the like.
What constitutes a freelance income?
The revenue of a freelancer depends on their assignments and mainly are contract-based tasks for companies and organisations.
Income tax laws in India state that any revenue generated by an individual by implementing their intellectual or manual skills is considered an income from a profession. And the income you earn is the sum of all receipts that you get from your clients.
You can be anyone from the following: Blogger, Vlogger, Digital Marketer, Social Media Manager, Consultant, Web Developer, Designer, Photographer, etc, to qualify as a freelancer for taxation purposes.
Click here to find out when freelancers need to register for GST.
What are the income tax slabs for freelancers?
The income tax slabs for freelancers are the same as that for salaried individuals. The higher your income, the more the tax. The same is calculated as below.
Income tax slabs under new tax regime (Applicable from FY2020-21)
|Rs 2.5 lakhs||Nil|
|Rs 2.5 to 5 lakhs||5%|
|Rs 5 to 7.5 lakhs||10%|
|Rs 7.5 to 10 lakhs||15%|
|Rs 10 to 12.5 lakhs||20%|
|Rs 12.5 to 15 lakhs||25%|
|Rs 15 lakhs and above||30%|
Current income tax slabs for FY 2019-20
|Rs 2.5 Lakhs||Nil|
|Rs 2.5 to 5 Lakhs||5%|
|Rs 5 to 10 Lakhs||20%|
|Rs 10 Lakhs and above||30%|
What is taxable income for a freelancer?
According to Section 80 of the Income Tax Act, a freelancer can cut down his/her tax outgo by more than Rs 1.5 lakh if they invest a specific amount in tax-saving instruments.
Tax Exemptions under Section 80
|80 C||Deduction up to Rs 1.5 Lacs
Applicable for the investment made towards provident fund, insurance, ELSS, tuition fees, FDs, etc
|80 CCC||Applicable for pension plans
The maximum exemption limit is Rs 1.5 lakhs
|80 CCD||Investment in central government schemes|
|80 CCF||Investment in government notified long-term infrastructure bonds
Exemption limit of up to Rs 20,000
|80 D||Premiums for health insurance are exempted|
|80 DD||Treatment for disabilities
Exemption limit of up to Rs 1.5 Lacs
|80 DDB||Treatment for specific diseases|
|80 E||Education loan|
|80 EE||Loan, buying a property|
|80 G||Donation made to a charitable trust, PM relief fund
Note: Net Taxable Income = Gross Taxable Income – Deductions
Freelancers who are just below the age of 60 and have an income of around Rs 2.5 lakhs per annum also qualify to pay taxes on their revenue.
According to Section 194J of the Income Tax Act, every professional service rendered by you is subject to 10% TDS. Like every salaried individual, freelancers can also claim a refund on TDS.
How to claim expenses to reduce tax liability?
Before understanding the term ‘expenses’, here are some of the essential conditions that should be followed.
- The expenses must be directly proportional to the amount spent while carrying out a specific task
- The expenses must be drawn during the relevant financial year
- The expenses must not include any capital or personal expenditures of the freelancers
- Any kinds of criminal activity should not cumulate the expenses
These expenses fall under travel to the client location, hospitality, office supplies, property rent, entertainment, meals, etc.
These expenses can be deducted from your gross taxable income to reduce your tax outgo. The Income Tax Act allows you to do this because these expenses are incurred for the purpose of acquiring and delivering your work.
How to calculate advance tax?
As simple as walking the line, follow these steps:
- Collect your invoices and receipts and calculate your total income
- Calculate your expenses and subtract them from your earnings
- Do not forget to include income from other sources like savings accounts and properties
- Calculate your tax after reviewing your total income against the tax slabs
Mark your calendar
|Deadline||Advance tax to be paid|
|Before 15th September||30% of the payable tax|
|Before 15th December||60% of the payable tax|
|Before 15th March||100% of the payable tax|
Before we end here a few critical points to remember:
- ITR-4 is the income tax form for freelancers and consultants
- If the tax liability of a freelancer does not exceed more than Rs.10,000 for a financial year, he/she need not pay taxes
- If a freelancer fails to pay advance tax, then he/she is liable to pay interests mentioned Under Section 234B and Section 234C
From a taxation perspective, freelancers fall under small businesses. And paying taxes is considered a civic duty. Taxes help the government pay salaries, construct roads and public buildings, hospitals, and provide shelter and food to the less fortunate.
So, have you filed your Income Tax return?
Further reading: The GST Registration Guide for Freelancers