Applicability of Taxes and ITR Filing for Freelancers

Freelancers are subject to both Income Tax and Goods & Services Tax (GST) in India. Understanding the thresholds and requirements for these taxes is essential for maintaining compliance.

• GST Registration

If a freelancer’s aggregate turnover exceeds ?20 lakhs (?10 lakhs for businesses in the northeastern and hill states), they must register for GST. The standard GST rate for most services is 18%, though this can vary based on specific services offered.

• Income Tax Rates for Freelancers

Freelancers must pay income tax according to the applicable rates. For individuals below 60 years of age, the following income tax slabs are relevant:

• New Tax Regime (Effective FY 2020-21)

• Old Tax Regime

• Presumptive Taxation Scheme

Freelancers can opt for the Presumptive Taxation Scheme under Section 44ADA of the Income Tax Act. This scheme allows individuals to declare 50% of their gross annual income as taxable, provided their total income does not exceed ?50 lakhs.

• Tax Audit Requirements

If a freelancer’s gross annual income surpasses ?1 crore, they are obligated to undergo a tax audit for their business income. This audit ensures that the financial statements are accurate and compliant with tax regulations.

• TDS Implications for Freelancers

Freelancers also need to be aware of Tax Deducted at Source (TDS). If freelancers make payments to professionals exceeding ?30,000 in a financial year, TDS is applicable at a rate of 10%.

Process for ITR Filing for Freelancers in India

Filing income tax returns (ITR) may seem daunting, but following a systematic approach can simplify the process. Here’s a step-by-step guide to ITR FIling for freelancers in India.

Step 1: Select the Appropriate ITR Form

Freelancers should choose between:

• ITR-3: For individuals and Hindu Undivided Families (HUFs) with income from a proprietary business or profession.
• ITR-4 (Sugam): For individuals, HUFs, and firms opting for the presumptive taxation scheme under Section 44ADA.

Step 2: Documents

Before filing, compile all relevant documents:

• Bank Statements: To verify income and expenses.
• Form 16A: For TDS details.
• Books of Accounts: To keep track of earnings and expenditures.
• Invoices: Proof of income from clients.
• Investment Proofs: Documents for tax-saving investments.
• GST Returns: If applicable, to show compliance.

Step 3: Calculate Your Total Income

Ensure you accurately calculate your total income, including all freelance income and any additional sources such as interest or rental income.

Step 4: Apply the Presumptive Taxation Scheme (if applicable)

If your gross receipts are up to ?50 lakhs, consider opting for the presumptive taxation scheme under Section 44ADA to simplify your tax obligations.

Step 5: Register on the Income Tax e-Filing Portal

Create an account or log in to the official Income Tax e-Filing portal.

Step 6: Fill in and Upload the ITR Form

Select the appropriate ITR form based on your income type and carefully fill in all required fields. Once completed, upload the filled form.

Step 7: Verify Your ITR

Verification can be done electronically through Aadhaar OTP, EVC through a bank account, or a digital signature. If e-verification isn’t possible, print the ITR-V form, sign it, and send it to the Central Processing Centre (CPC) in Bangalore within 120 days of filing.

Common Exemptions and Deductions for Freelancers

Freelancers can leverage several deductions under the Income Tax Act to reduce their taxable income:

Section 80C

• Exemption: Up to ?1.5 lakhs on investments in specified financial instruments like Equity Linked Savings Schemes (ELSS), Public Provident Fund (PPF), and life insurance premiums.

Section 80D

• Exemption: Premiums paid for health insurance policies for self, family, and parents.

Section 80E

• Education Loan: Interest paid on loans for higher education is eligible for deduction.

Section 80G

• Charitable Donations: Contributions to recognized charitable organizations can be claimed as deductions.

Section 80CCD

• Retirement Savings: Contributions to the National Pension Scheme (NPS) can provide additional deductions.

Section 80CCF

• Infrastructure Bonds: Investments in specified government-notified infrastructure bonds are eligible for deductions up to ?20,000.

Section 80DD

• Disability Treatment: Exemptions for expenses incurred for the medical treatment of disabilities.

TDS Implications for Freelancers in India

Tax Deducted at Source (TDS) is a crucial component of tax compliance for freelancers. Here’s how TDS applies:

Relevant Sections for TDS Deduction

• Section 194J: Applicable to professional fees, technical services, royalty, and non-compete fees. TDS is deducted at 10%.
• Section 194H: Applicable to commissions and brokerage. TDS is deducted at 5%.
• Section 194C: Relates to payments for contracts, with TDS at 1% for individuals and HUFs, and 2% for others.

Advance Tax for Freelancers

Freelancers must consider advance tax obligations if their annual tax liability exceeds ?10,000. Advance tax must be paid in four installments throughout the financial year:

1. 1st Installment: By June 15 - 15% of the estimated tax liability.
2. 2nd Installment: By September 15 - 45% of the estimated tax liability (including the first installment).
3. 3rd Installment: By December 15 - 75% of the estimated tax liability (including the first two installments).
4. 4th Installment: By March 15 - 100% of the estimated tax liability.

Steps to Calculate Advance Tax

1. Estimate Total Income: Calculate your expected income from all sources.
2. Estimate Taxable Income: Subtract allowable expenses and deductions from your estimated total income.
3. Calculate Tax Liability: Apply the applicable income tax rates to your taxable income.
4. Adjust for TDS: Deduct any TDS already withheld from your payments to arrive at your net tax liability.

Pay in Installments: Distribute your net tax liability across the specified due dates.