Freelancing is popular because it brings the liberty of pursuing creative opportunities and many lucrative work options. The income tax department also has lined up several favourable tax rules and rebate options for freelancers under IT Act. Let’s look at some helpful information on the tax applicability, computations, exemptions, and filing process for freelancers.
What is ‘Freelancing’ As Per Income Tax Rules?
Those who generate income by applying their intellectual, manual, creative, or artistic skills without being employees of any company or organisation are freelancers.
Their income falls in the bracket of ‘profit and gains from business and profession.’ Profiles of software developers, consultants, tutors, content writers, fashion designers, web designers, etc., are considered freelancers. Since they earn through multiple sources, their tax filing is slightly complex.
Tax Applicability for Freelancers
Freelancers have to pay tax on their income as per the current applicable rate under Income Tax Act. They have to follow the laws of Income Tax and GST (Goods & Services Tax). Those having their annual turnover above ₹20 lakhs should register under GST purview. For North-Eastern Hill states, this limit is ₹10 lakhs. The GST rates vary according to the goods and services of freelancers.
Presumptive Taxation Scheme
If the annual income is less than ₹50 lakhs, freelancers can opt for the Presumptive Taxation Scheme under Section 44ADA of the Income Tax Act, 1961. In this situation, they can pay tax on only half of their gross annual income. Tax under Presumptive Scheme can be filed using the ITR-4 form.
However, if their gross annual income exceeds ₹1 crore, they require a tax audit on their business income. Those not falling in the Presumptive Taxation Scheme can file their returns using the ITR-3 form.
Steps to File ITR for Freelancers
- Visit e-portal of Income-tax e-filing
- Go to the ‘Download’ tab to download the ITR-4 form
- Fill the ITR-4 form carefully by giving correct details of general information, gross income, deductions and taxable income, income from business and profession, TDS (tax deducted at source), and advance/self-assessment tax details.
- After filling out the downloaded form, upload it over the specified link. For online filling and submission of the form, fill it online and submit it after e-verification.
- Select the tax payment type
- Select the correct assessment year
- Provide contact details and PAN number
- Select the preferred mode of payment
- Double-check all the information filled
- Initiate the payment and get the tax receipt (Retain tax receipt for income tax return)
Managing TDS as a Freelancer
Companies employing freelancers may be liable to deduct TDS at the rate of 10% (approx.) from their payments to the freelancers if the total amount exceeds ₹30,000 in a financial year. The tax deducted works as tax paid on behalf of the freelancers. If the total tax liability exceeds the TDS paid, the freelancer can claim tax refunds.
Tax Computations and Exemptions
Freelancers can use Form 26AS for computing tax. For knowing about the deductions and exemptions, refer to the table given below:
- Section 80 C: Exemption of up to ₹1.5 lakh on investing in ULIP, ELSS, FDs, etc.
- Section 80 CCD: Investing Central government schemes
- Section 80 CCF: Exemption of up to INR 20,000 on investment in Government’s infrastructural bonds
- Section 80 D: Exemption on premium for health insurance
- Section 80 DD: Exemption up to ₹1.5 on treatment for disabilities
- Section 80 E: Exemption on education loan
- Section 80 G: Exemption on donations made to relief funds & charitable trusts
Freelancers can plan and have a fair chance of reducing their taxes by claiming exemptions and making appropriate tax-saving investments. This way, they can avail dual benefits of substantial income tax returns and growth of their funds.
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