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Understanding tax implications on Freelance Income

Updated: Mar 18

Covid19 has changed the world – the way we work, the way we do business and interact with people. The pandemic has triggered a new work environment – the virtual office.  This new work revolution has given a boost to a lot of freelancing jobs in India and abroad, especially in the skilled services sector. With employees facing pay cuts or even losing jobs, freelancing has become a good option to supplement their income. It is a win-win situation even for companies as they strategize to optimise costs. Some of the popular options in freelancing are content writers, graphic designing, translators, online teaching, video editing, SEO analyst, social media manager, etc. If you are a freelancer or planning to take up freelance work, it is imperative to understand the tax implications:

How is freelance income taxed?

If you are a freelancer, you are not on the permanent payroll of the company. You get hired to work on specific assignments for a specific term and get paid for the work upon completion and submission. Such income will be taxable as ‘Profits and Gains from Business or Profession’. Your gross income will be the aggregate of all receipts you get in the course of carrying out your profession.

What are the expenses allowed as deduction?

Unlike salaried employees who are allowed a standard deduction of flat Rs.50,000 on an annual basis, you as a freelancer do not enjoy this provision. However, as a consultant, you are allowed to claim expenses as deduction on actual basis which have been incurred by you in connection with your work and which are not personal in nature. These will broadly include expenses like internet expenses, mobile expenses, printing and stationery, conveyance expenses etc. These can be claimed to the extent these are attributable to your activity as consultant after removing component of personal use if any. You can also claim very small portion of house rent (if rented) and electricity expenses in respect of the house. You are also allowed to claim depreciation on computer and printer used for your work. Additionally, you can also claim expenses incurred on repairs and maintenance of computer and printer. The net of professional charges received over the expenses incurred is taxable under the head ‘profits and gains of business and profession’.

In case you are earning from any other sources of income like interest, dividends, capital gains, rental income, etc. they are taxed under respective head and then all the incomes are added up.

Besides the work-related expenses, you can claim deductions as a consultant under Section 80C, 80CCD, 80D, 80TTA, etc.

If you have a home loan, you can also claim interest deduction up to a maximum limit of Rs.2 lakhs while aggregating income from all sources.

Is TDS applicable to freelancers?

Every time a freelancer or a small business owner makes a payment to professionals which exceeds Rs.30,000 per transaction or in aggregate during a financial year, TDS applies at the rate of 10%. As a freelancer, you are expected to raise an invoice for the work or service you provide and present this invoice to the entity you have contracted with. When they honour the invoice, ensure that the amount paid to you is net of TDS or tax deducted at source. The IT department ties in all your income and TDS by linking it to your PAN number. If you estimate that your annual tax payable after adjusting for TDS is going to be more than Rs 10,000, then you also need to pay Advance Tax, equal to that amount. This must be paid before the 15th of March in a given financial year. Failure to do so can lead to penalties. As a consultant, you will be taxed as per the same rates as a salaried person. At the time of filing returns, you need to arrive at the additional tax payable or refund due based on the final income figure.

Knowing the taxation rules will help you in ensuring overall tax efficiency for your freelance income.

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