Table of Contents
- How Income Tax Rules Define Freelancing
- Calculating Gross Income
- Deducting Expenses to Find Taxable Income
- Calculating and Deducting Depreciation
- Treatment of Income From Other Sources
- Exemptions and Deductions as Per ITR Rules
- Application of Tax Rates For ITR Filing
- Key Takeaways
Freelancing is one of the most promising career choices we have in this new era. Especially in a country like India, which has one of the fastest-growing freelance markets. But when you earn well, filing an income tax return every year becomes a must. This is thanks to the Indian government, which has separate rules for freelancers and offers saving options with favorable tax rules.
This article will cover everything you need to know about the ITR process as a freelancer.
How Income Tax Rules Define Freelancing
As per the Indian ITR Laws, an individual’s income generated by using his intellectual or manual skills is included under “Profit and gains from B&P.” Here, B&P stands for business and profession. So as per the Indian Income Tax laws, freelancing work is also considered a business and profession. Thus, any income generated from freelancing is covered under income from B&P.
Other related work such as blog consultancy, web designing, software development, tutoring, etc., is also included in this category. As a freelancer, there are certain things you need to take care of.
Calculating Gross Total Income
The very first step to filing your income tax return as a freelancer is to calculate your gross total income. Your gross total income is calculated from 1st April to 31st March for the financial year. For example, for 2021, the financial year starts on 1st April 2021 and will end on 31st March 2022.
It becomes easy to calculate gross total income as a freelancer as most payments are generally paid online.
Deducting Expenses to Find Taxable Income
After calculating your gross income, the next thing to do is calculate all your expenses. Once done, you need to deduct these expenses from your gross total income. This is so because you need to pay tax only on the final profit remaining after deducting expenses. As a freelancer, these expenses can be anything from your Internet charges, only service costs, telephone charges, etc.
For example, a freelance content writer may spend on a content editing or proofreading tool and consider its charges a business expense. However, some expenses can have a personal and business component such as internet and telephone charges. In such cases, you need to identify the percentage of consumption that goes for business purposes and consider it a business expense.
Calculating and Deducting Depreciation
Tax for freelancers is calculated on net income. It is important to calculate and deduct depreciation from your gross income to find your net income. Depreciation is the amount of wear and tear and decrease in the value of assets such as electronic items. You need to calculate the percentage of depreciation in your assets. These assets can be your laptop, printer, computer, and other devices that you use for business purposes.
You can also claim tax exemptions for certain types of payments. For example, if you work from a rented space, you can also claim exemption of rent paid.
Treatment of Income From Other Sources
When paying freelance income tax, you need to include all types of income. The other income apart from freelance business can be,
- Any gain from the sale of property or rental income
- Accrued income on a fixed deposit or saving account as interest
- Any income from debentures, shares, equity, etc.
- All other types of income not included in income from business and profession
Exemptions or Deductions as Per ITR Rules
Just like other business professionals and salaried individuals, freelancers can also get tax exemptions and deductions. The list of these exemptions and deductions is as below.
|Section||Exemptions and Deductions|
|80 C||A maximum of ₹1.5 Lakh exemption on ULIP, ELSS, FD, insurance, etc.|
|80 CCD||Any central government schemes investments|
|80 CCF||A maximum of ₹20,000 exemption on government-notified infrastructure bonds investment|
|80 D||Exemption on health insurance premium|
|80 DD||A maximum of ₹1.5 Lakh exemption on treatment expenses on disabilities.|
|80 E||Exemption on education loan|
|80 G||Exemption for donating to a certain charitable trust and relief funds|
Application of Tax Rates for ITR Filing
The next question is how to do your taxes as a freelancer? You need to start by understanding your GST registration requirements. As a freelancer, you need to pay goods and service tax (GST) if your aggregate turnover in a year is above 20 Lakh. If your annual turnover is below this amount, you just need to fill your individual ITR. As per the new tax rules, any freelancer below 60 years of age has to pay tax as follows:
|Income Range||Tax (%)|
|For income less than ₹2.5 lakhs||Nil|
|For income from ₹2.5 lakhs to ₹5 Lakhs||5%|
|For income from ₹5 lakhs to ₹7.5 lakhs||10%|
|For income from ₹7.5 lakhs to ₹10 lakhs||15%|
|For income from ₹10 lakhs to ₹12.5 lakhs||20%|
|For income from ₹12.5 lakhs to ₹15 lakhs||25%|
|For income above ₹15 lakhs||30%|
After calculating the taxable income and tax payable as per the above rates, you need to get an ITR- 4 form. You can download this form from the ITR e-filing portal. As per section 44 AB, if your income exceeds ₹1 crore, you need to get your business account books audited.
So check your eligibility and file tax accordingly.
- As a freelancer, your work is considered a business. Thus, income from this work is recognized as income from business and profession.
- Your tax liability is calculated and paid for a financial year. This year starts from 1st April of the first year and ends on 31st March of the following year.
- Your net taxable income will be calculated by deducting your business expenses and depreciation from business income. Thereafter, you further need to calculate income from other sources, if you have any, to find your total taxable income.
- You can save on your tax liability if any of your activities fall under section 80C, 80 CCD, 80 CCF, 80 D, 80 DD, 80 E, and 80 G.
- To file a freelancer income tax return, you need to study the tax slab and see whether your income is taxable. If you have an income of up to ₹2.5 lakhs, the tax liability is nil. After that, the tax rate increases by 5% for each tax slab, as mentioned above.
Filing tax as a freelancer can be tricky if you are not aware of the requirements. However, you can file your taxes and get tax rebates to have a reduced tax liability with the above information. As a freelancer, your income tax return filing process differs from other professionals. But the process is not that complicated.
As a freelancer, you need to file your tax return under ITR form – 4. However, if your annual aggregate turnover is above ₹1 crore, you must get a GST registration and file a GST return.
According to GST laws, you can calculate aggregate turnover by adding up the value of your taxable sales, exempt sales value, export of goods and services, and interstate supplies. If this aggregate amount exceeds ₹1 crore, you must register for GST and file a GST return.
As a freelancer, you can get deductions for business expenses such as rent of the property, office expenses, travel expenses, repairs, and depreciation.
Unfortunately, there is no such thing because calculating income tax requires the application of multiple tax provisions. However, you can take the help of a tax professional to calculate your tax and file the return for you.
You can easily file your freelance income tax return. You will need to calculate your taxable income and final tax liability. Next, you need to fill out the ITR Form 4 and submit it on the ITR e-filing portal.