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Faster, easier and secure gateway to e-file income tax return

Income Tax Guide for Freelancers to Understand ITR Basics

Any income generated from a profession which involves skilled work and the skill is manual or intellectual is taxable. This income will be quoted under the “Profits and Gains of Business and Profession” section. The income is the sum of all the receipts that shows a record of your delivered to the clients based in India or abroad. Your bank account statement can be used as record proof for the payment you have received from your clients.

Accounts Book for Freelancers

Freelancers also require to maintain an account book to keep a check for their due and received income.

There are two types of accounting methods:

  • Accrual Basis of Accounting (also called Mercantile Basis)
  • Cash Basis of Accounting
Accrual Basis of Accounting Cash Basis of Accounting
Income is accounted when confirmation of payment arises. Income is confirmed when money is received.
Expenses recorded when payments are necessary to made. Expenses recorded when the payments had been done.
When payment is confirmed from client’s side, tax payment becomes necessary even if the payment does not arrive in real. Tax liability applies for the year when income is received in hand.
All heads of income including salaries, house property, and capital gains are followed. Only profits and income from Business or Profession including income from other sources are allowed.
Example of income record: An invoice has been raised on 1st Jan but payment arrived by 1st April from the client side. In this case, revenue will be entered regarding when the invoice was raised and the steps have been completed. Example of income record: For the same example, the revenue will be added only on 1st April when the payment arrived.
Example for Expense record: If mobile bill dated 1st Feb to 1st March has been received then it will be added to the expense list of March regardless of the fact Example for Expense record: If mobile bill dated 1st Feb to 1st March has been received then it will be added to the expense list of March when you pay it off.
when you pay that. You can also add up an estimated bill till 31st March to close account book for tax purpose. But if you pay it in April then it will go to your next year’s account book.

Note: make sure that, the accounting method you follow must be followed by all the clients, revenues, and expenses.

How to select the preferable accounting method freelancers

Using cash basis of accounting may seem to reduce your tax liability but in real it just postpones tax outgo. No tax reduction can be availed by using this method. Accrual basis method is more useful if your payments are regular.

Choosing a method means you must follow that one regularly and should not change it very often if you want to save on tax. According to section 44AA and Rule 6F of the Income Tax Act, freelancers must maintain accounts book for taxation purpose.

Expenses allowed as a deduction

The expenses incurred during fulfilling a freelancing job are eligible to deduct from the actual income. The expenses can be of office furniture or service delivery or transport fares which related directly to the job.

To claim a deduction for these expenses, there are conditions specified:

  • The expense must have incurred for the freelancing work.
  • The whole amount of expense must be incurred for the freelancing work.
  • The expense must be incurred during the financial year.
  • It should not be a personal expenditure of the freelancer.

Eligible expenses that can be claimed for deductions are:

  • Rent of the property
  • Repairs undertaken
  • Depreciated asset
  • Office expenses
  • Travel Expenses
  • Meal, entertainment or hospitality expenses
  • Local taxes and insurance for your own business property
  • Domain registration, apps purchased to test your product are also allowed as expenses.

To claim expenses that are common between personal and professional purposes can be claimed but only for the reasonable amount. For such amount, depreciation is allowed as a deduction but not on the full amount.

Total taxable income and tax payable

Net Taxable Income = Gross Taxable Income - Deductions

Freelancers can use the deductions mentioned under Section 80C which allow taxpayers to save tax against various investments in financial products. The total taxable amount can be reduced by up to INR 1.5 lakhs by making these investments.

Freelancers Must Use ITR-4 Form To E-file Income Tax Returns

For freelancers, if the total tax liability exceeds INR 10,000 during a financial year than they need to pay advance tax.

Steps to calculate advance tax:

  • Add up all your receipts and determine your total income.
  • Subtract expenses directly related to your work.
  • Add income from other sources, say a house property or savings account.
  • Find out the tax slab you belong to and calculate your tax due. 
    (Remember to deduct TDS)

The deadlines to make advance tax payments are:

On or before 15th September Up to 30% of the advance tax
On or before 15th December Up to 60% of the advance tax
On or before 15th March Up to 100% of the advance tax

To pay advance tax, you can select any of the one methods:

Pay it online through the I-T Department's website

Or,

Fill out a paper challan and deposit tax by physically by visiting your bank.

If one fails to make advance tax, then they are liable to pay penalty interest as described under Section 234B and Section 234C.

Section 234B applies when someone does not pay the Advance Tax according to the deadlines. And Section 234C applies when interest is not paid according

Other Taxes Applicable to Freelancers

  • Value Added Tax: only applicable when physical goods are sold.
  • Service Tax: the service provider must recover the service tax from the buyer which need to be paid by the provider. This will be added to the total value of the good which the buyer will get after making the payment. The rate of service tax is 14% at the moment and will be affective until GST roll out.

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