How to File Your Income Tax Return if you are a Freelancer
What is Freelance Income?
Many professionals qualify as freelancers, such as content writers, bloggers, business consultants, marketing consultants, designers, software developers, tuition teachers, etc. These freelancers generate their income by providing their manual and intellectual services to their clients. The Indian IT department categorizes freelance income as ‘profit and gains from business and profession’. From a tax filing perspective, freelancing is considered a ‘business and profession.
ITR Filing for a Freelancer
Filing your ITR as a freelancer could be slightly trickier as you don’t have an HR department who will hand out the famous form 16 to you and guide you through the ITR filing process. Also, more clients and different quantum of incomes and expenses mean more calculations and record-keeping. ITR filing, even as a freelancer, includes the same ground rules that you follow for any other profession or business – Income and Expenses.
Additional Read: Understanding the Basics of Income Tax for Beginners
Following are some key pointers that will come in handy when you file your freelance ITR,
As a freelancer, you may have different arrangements for receiving payments – project basis, monthly retainer, etc. To keep a proper record of every income and expense, you must maintain an accounting book under section 44AA of the IT Act. You can do so by opting for the Accrual Basis of Accounting or Cash Basis of Accounting.
Brief ITR filing Process
The ITR-4 form applies to freelancers for filing returns. You can either fill it online on the IT portal itself or download the form from the portal, fill it offline and then upload the XML file you have saved and generated. Irrespective of the ITR filing process you opt for – online or offline – your ITR filing process will be complete only after the e-verification of your ITR.
Additional Read: Benefits of Filing Income Tax Return on Time
The tax deductions that you can claim depend on the tax slab that fits you. Your net income is the criteria to understand which IT slab you come under. If your net income is less than Rs 50 lakhs, you can pay tax on only half of your gross income per the Presumptive Tax Scheme stated under section 44ADA of the IT Act. You are eligible for a tax audit if your gross income is over Rs 1 crore.
There will be several expenses that you may have incurred in the bid to provide freelance services to your clients. These include but are not limited to Internet bills, rent, travelling expenses, hospitality and entertainment costs, depreciation, repairs, subscription charges, office furniture cost, other utility bills, etc. You may have also hired personnel to assist you with your freelance work. That is also a cost you must consider while tabulating your expenses. All these expenses directly related to generating your freelance income for a given assessment year have to be deducted from your gross income to arrive at your net taxable income.
Additional Read: How to e-verify ITR through a Demat Account
For the clients you freelance, deduct 10% tax (as per section 194J of IT Act) from your total payment as tax Deducted from Source (TDS). Depending on the tax slab applicable to you, you can claim this as a refund from the IT department. Furthermore, if you hire anyone to assist you with your freelance work, you are also supposed to deduct 10% tax and only then pass on their payments. You have to pay this amount as TDS while filing your return.
You must register for GST if your total revenue for a given year exceeds 20 lakhs. GST does not apply to you if your revenue is under 20 lakhs. If you are eligible for GST registration or have a GST number already, you must charge GST to your clients. The rate of GST depends on the freelance service you are providing, but most services under GST purview have a rate of 18%.
As a freelancer, if your tax liability as per your calculations is over Rs 10000 for a given year, you will have to pay taxes quarterly. Since this payment of tax is made in advance, it is called ‘Advance Tax’. As per this mechanism, you are expected to pay a minimum defined percentage of your tax before the end of every quarter. You can make your payments for Advance Tax through challan 280 of the IT department. Once you complete this payment, you will be furnished with a receipt. You will require this receipt at the time of filing your ITR, so keep it handy. If you are eligible for Advance Tax and choose not to pay the advance tax under sections 234 B and 234C, you will face penalties.
Additional Read: 7 Best Tax Saving Options available for You
The IT department gives you a fair share of opportunities to reduce your taxes by claiming deductions and making tax-saving investments as mentioned under sections 80 and 80C of the IT Act, respectively. It is then solely on you as to how you make the most of this opportunity. It is always wise to explore every faucet of investments that can help you save taxes as they present dual benefits of saving taxes and growing your wealth.
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