CHENNAI: The increased availability of freelance jobs has encouraged many Indians to ditch their eight-hour shifts and work at their convenience. However, when it comes to paying income tax, freelancers are usually unaware of the procedures or end up paying hefty service charges to accountants to maintain their ledger book to save more taxes.
“For freelancers who don’t want to undergo the fuss of calculating their returns per project and the taxable income from such return, paying advance taxes is absolutely essential. There is no hassle of keeping track of all your expenses per project, you presume your income is x lakhs and pay tax on 50 per cent of such income,” says Archit Gupta, founder and CEO, ClearTax. Presumptive tax should ideally be paid in four instalments by filling out the ITR-4 form based on what you presume your income will be for the year ahead.
A freelance professional is essentially running a business, so any expense that he incurs while providing services demanded by his client is an expense. If you’re a software developer, use a laptop and certain tools to test your application, and work from your house, the residential rent, the cost of broadband services and the depreciation of the assets you possess for the purpose of business are all expenses.
Expenses that you don’t incur periodically, such as taking a client for lunch, or travel costs that you incur to meet or transact with a client who lives in a different city or country, can also be claimed as deductions.
Therefore, when you pay presumptive tax, your taxable income would only be 50 per cent of your total income and you pay tax according to the tax slab you fall under, Gupta said.
“However, presumptive tax or advance tax is not applicable for all types of freelancers, the scheme is available only for certain professionals,” he added.Deductions on taxing a freelance professional are similar to those of a salaried employee. One can claim deductions such as premium paid on a life insurance or medical insurance policy, contributions to PPF, NPS or tax-free equity mutual funds, and any other 80 C, 80 CCC deductions.
For freelancers, indirect taxes play an important role. If one’s total income is above the `20 lakh bracket and one is dealing with inter-state services, a goods and services tax (GST) registration is necessary.
“You’ll have to start charging GST in your invoices and claim input tax credit on your expenses. So one has to also consider the impact of indirect taxes,” Gupta said.
Taxes for freelancers
Opting for advance taxes might help avoid breaking down expenses incurred in every project
Deductions under 80 C and 80 CCC are applicable for freelance professionals
Freelancers who earn more than D20 lakh a year should register for GST