Income Tax for Freelancers

Not everyone prefers working on a 10-to-6 job. Many people choose freelancing because it offers flexibility and the freedom to work from home, a café, or a coworking space. Freelancing allows individuals to manage their own schedules and pursue different interests while earning income. However, under the Income Tax Act, 1961, freelancers are also required to pay income tax on the income they earn, just like salaried individuals or business owners.

Freelancing Income

Freelancing income arises when a person is hired to complete specific assignments or projects for a fixed period and receives payment after completing the work. Unlike regular employment, freelancers are not guaranteed continuous work, but they enjoy greater flexibility in choosing when and where they work.

In most cases, freelancers are not employees of the company they work for. Their names are not included on the company’s payroll, and they usually do not receive employment benefits such as provident fund (PF) or other statutory perks. Instead, freelancers work independently and deliver the assigned tasks within the agreed deadlines.

According to Indian tax laws, income earned by using intellectual or professional skills is treated as professional income. Therefore, freelancing income is taxed under the head “Profits and Gains from Business or Profession.”

The gross income of a freelancer generally includes all payments received from clients for services provided. Bank statements can help track these receipts, especially when payments are received through proper banking channels.

Expenses Allowed as a Deduction

Freelancers can claim deductions for expenses that are incurred while performing their professional work. These expenses must be directly related to the freelancing activity and help in generating income. Common examples include office supplies, travel expenses, equipment purchases, or communication costs.

According to the Income Tax Act, 1961, freelancers are allowed to reduce such eligible expenses from their total income to calculate their taxable professional income.

Conditions to Claim Expenses as a Deduction from Freelancing Income

To claim an expense as a deduction, the following conditions should be satisfied:
The expense must be related to the freelancing work being carried out.

It should be spent fully and exclusively for professional purposes.

The expense must be incurred during the relevant financial year.

It should not be a capital expenditure or personal expense of the freelancer.

The expense should not be incurred for activities that are illegal or prohibited by law.

The freelancer should not be opting for the presumptive taxation scheme.

Expenses That Can Be Claimed as a Deduction

Rent of Property

If a freelancer rents a property or workspace to perform professional work, the rent paid for that property can be claimed as a deduction.

Repairs Undertaken
Expenses related to repairs can also be claimed. This includes repairs to:
Rented office property (if the freelancer is responsible for repairs)

Owned business premises
Equipment used for work such as laptops, printers, or other devices

Depreciation
When a freelancer purchases a capital asset such as a laptop, camera, or other equipment used for work, the full cost cannot be claimed in one year. Instead, the asset cost is gradually deducted through depreciation.

For example, if a laptop is purchased for ₹60,000 for freelance work, a portion of its cost can be deducted every year as depreciation based on the rates specified under the Income Tax Act.

Office Expenses
Expenses incurred for running the freelance work are also allowed as deductions. These may include:

Printer and office supplies

Telephone bills

Internet charges

Stationery and operational costs

Local conveyance expenses

Travel Expenses
Travel costs incurred for meeting clients or attending work-related meetings within or outside India can be claimed as a deduction.

Meal, Entertainment, or Hospitality Expenses
Expenses spent on client meetings, business lunches, or entertainment with the intention of acquiring new clients or maintaining business relationships can also be claimed.

Local Taxes and Insurance
Local taxes or insurance premiums related to business property can be deducted.

Domain and Software Expenses
Costs incurred for domain registration, website hosting, software tools, or applications used for freelance work are also considered eligible business expenses.

These deductions help freelancers reduce their taxable income and ensure that tax is calculated only on the actual profit earned from freelancing activities.

How to Claim Expenses Used for Both Personal and Professional Purposes

Sometimes freelancers use certain assets or incur expenses that serve both personal and professional purposes. In such situations, only the portion of the expense that is related to professional work can be claimed as a deduction.

According to the Income Tax Act, 1961, freelancers must calculate the proportionate amount of the expense that is directly related to their professional activities and claim only that part as a deduction under “Profits and Gains from Business or Profession.”

For example, if a freelancer uses their internet connection or mobile phone for both personal and professional work, only the percentage used for professional purposes can be deducted while calculating taxable income.

Expenses Explicitly Disallowed as Deduction
Certain expenses cannot be deducted from income while calculating taxable income under the Income Tax Act. These include the following:
Income tax paid by the taxpayer cannot be claimed as a deduction.

Interest, penalties, or fines paid due to late payment or non-payment of income tax are not allowed as deductions.

Payments made to a relative (such as spouse, parents, children, or other lineal ascendants or descendants) or to a person having a substantial interest in the business (10% or more) will not be allowed if the payment is higher than the fair market value of the goods or services provided. This restriction is specified under Section 40A(2) of the Income Tax Act, 1961.

If a business expense exceeds ₹10,000 and is paid in cash, the deduction will not be allowed under Section 40A(3) of the same Act.

Understanding these rules helps freelancers ensure that they claim only eligible deductions and avoid issues during income tax assessment or scrutiny.

Case Study 1
Sujal, a freelance photographer, rents a property owned by his married sister to carry out his professional work. Normally, rent paid for business premises is allowed as a deduction from freelancing income. However, since the property belongs to his sister, Sujal decides to pay a rent amount that is higher than the prevailing market rate to divert some of his income to her.

Such excess payment beyond the fair market value will not be allowed as a deduction under the Income Tax Act, 1961.

Will this come under the scrutiny of the Income Tax Department?
Suppose Sujal claims the entire rent amount as a business expense and reduces it from his taxable income. His sister, who has no other income, pays only a lower tax due to the applicable slab rates. In such a situation, the Assessing Officer may examine the transaction and disallow the portion of the rent that exceeds the fair market value of the property, especially because the payment is made to a relative.

Case Study 2
Sujal, a freelance photographer, hires another photographer to handle additional work during the peak season. He pays ₹25,000 for the services provided by the other photographer. However, the payment is made entirely in cash.

According to the provisions of the Income Tax Act, 1961, business expenses exceeding ₹10,000 paid in cash are generally not allowed as deductions. Therefore, the amount paid by Sujal in cash for the services of the other photographer may not be permitted as a deductible expense while calculating his taxable income.

Presumptive Taxation
Freelancers who want a simpler way to calculate and pay taxes can opt for presumptive taxation. Under this system, taxpayers are not required to maintain detailed books of accounts or get them audited. Instead, a fixed percentage of their turnover or gross receipts is treated as taxable income.
Presumptive taxation serves as an alternative to the regular method of calculating income and tax.

For Freelancing Businesses
If a freelancer is engaged in a business activity and the turnover does not exceed ₹2 crores, they have to declare a minimum of 8% of the total turnover or gross receipts as their taxable income. (P.S. It is always recommended to report correct & factual numbers.)

If the transactions are made digitally, the minimum income that can be declared is 6% of the turnover. (P.S. It is always recommended to report correct & factual numbers.)

Additionally, the turnover limit of ₹2 crores can be extended up to ₹3 crores if cash receipts do not exceed 5% of the total receipts.

For Freelancing Professionals
If a freelancer is engaged in a professional activity and the total gross receipts do not exceed ₹50 lakhs, they can declare 50% of their gross receipts as taxable income.

The threshold of ₹50 lakhs can be increased to ₹75 lakhs if cash receipts do not exceed 5% of the total receipts.
Presumptive taxation simplifies tax compliance for freelancers by reducing paperwork and making the tax calculation process easier.
Income Tax Filing Process for Freelancers

Freelancers must file their income tax return every year based on their income and the taxation scheme they choose. The filing process can be completed online through the official portal of the Income Tax Department of India.

Steps to File Income Tax Return for Freelancers

Step 1: Visit the Income Tax E-Filing Portal
Go to the official portal of the Income Tax e-Filing Portal and log in using your PAN, password, and other required credentials.

Step 2: Choose the Appropriate ITR Form
If you are not opting for the presumptive taxation scheme, you need to file your return using ITR-3.

In this form, you must provide details such as:

Basic personal information

Gross total income

Deductions claimed

Taxable income

Business or professional income details

Profit and Loss statement

Balance sheet information

TDS (Tax Deducted at Source) details

Advance tax and self-assessment tax payments

If you are opting for the presumptive taxation scheme, you need to file your return using ITR-4.
In this case, you will be required to fill in:

Basic details

Gross total income

Deductions

Taxable income

Presumptive business or professional income

TDS details

Advance tax and self-assessment tax information

Step 3: Verify TDS and TCS Details
Freelancers should check Form 26AS AIS & TIS to verify the TDS (Tax Deducted at Source) and TCS (Tax Collected at Source) credits available plus any other incomes or transactions appearing in these statements. These credits can be adjusted against the total tax liability while filing the return.

Books of Accounts for Freelancers

Freelancers often wonder how they should record their income — should it be recorded when it becomes due or when the payment is actually received? Two common accounting methods help determine this:

Accrual Basis of Accounting (also known as Mercantile Basis)

Cash Basis of Accounting

Accrual Basis of Accounting
Income is recorded when the right to receive it arises.

Expenses are recorded when the obligation to pay occurs.

Tax liability arises when the income is recorded, even if the payment has not yet been received.

This method can be applied to all heads of income and is mandatory for income such as salary, house property, and capital gains.

Cash Basis of Accounting
Income is recorded only when it is actually received.

Expenses are recorded only when they are actually paid.

Tax liability arises in the year the income is received, meaning tax is paid only after the money is in hand.

This method is permitted only for income from business or profession and income from other sources.

Example 1

Accrual Basis:
If you issue an invoice to a client on 2 February but receive payment on 4 April, the income will be recorded on 2 February, the date the invoice was issued.

Cash Basis:
In the same situation, the income will be recorded on 4 April when the payment is received, which may fall in the next financial year.

Example 2

Accrual Basis:
If your mobile bill for the period 15 February to 15 March is received, it will be recorded as an expense in March, regardless of whether it is paid by 31 March or later. When closing the books on 31 March, the estimated expense for the remaining days of March may also be accrued on a reasonable basis.

Cash Basis:
The same mobile bill will be recorded as an expense in March only if it is paid before 31 March. If the payment is made in April, it will be treated as an expense in the next tax year, even though the usage relates to the previous year.

Important Points to Remember
The accounting method chosen must be applied consistently for all clients, income, and expenses.

According to ICDS-1, if an Individual or HUF is required to have their accounts audited under Section 44AB, the accrual method must be used to compute total income for income tax purposes.

How to Choose an Accounting Method
At first glance, the cash basis of accounting may seem like it reduces tax liability. In reality, it generally only delays the payment of taxes rather than lowering the total amount payable.

After selecting an accounting method, it should be applied consistently. Frequent changes in the method are not permitted, especially if the intention is to reduce or avoid taxes.

In most situations, the accrual basis is considered more practical unless your income receipts are irregular, uncertain, or unpredictable. The Income Tax Act requires certain taxpayers to maintain books of accounts for tax purposes. These requirements are specified under Section 44AA and Rule 6F.
However, there are prescribed limits for income or turnover below which maintaining books of accounts is not mandatory.

Note: If you choose the presumptive taxation scheme, maintaining books of accounts is not required.

Books of Accounts for Freelancers
Freelancers often need to decide how to record their income — whether it should be recognized when it becomes due or when it is actually received. The following two accounting methods help determine this:

Accrual Basis of Accounting (also known as Mercantile Basis)

Cash Basis of Accounting

Accrual Basis of Accounting
Income is recorded when the right to receive it arises.

Expenses are recorded when the liability to pay occurs.

Tax liability arises when the income is recorded, even if the payment has not yet been received.

This method can be applied to all heads of income and is compulsory for income such as salary, house property, and capital gains.

Cash Basis of Accounting
Income is recorded only when it is actually received.

Expenses are recorded only when they are actually paid.

Tax liability arises in the year the income is received, meaning tax is payable only after the income is in hand.

This method is allowed only for income from business or profession and income from other sources.

Example 1
Accrual Basis:
If you issue an invoice to a client on 2 February but receive the payment on 4 April, the income will be recorded on 2 February, the date the invoice was issued.

Cash Basis:
In the same situation, the income will be recorded on 4 April, when the payment is received. This may fall in the financial year following the year in which the invoice was raised or the work was completed.

Example 2
Accrual Basis:
If your mobile bill for the period 15 February to 15 March is received, it will be recorded as an expense in March for accounting purposes. This applies regardless of whether the payment is made before 31 March or later in the next financial year. When closing the books on 31 March, the estimated expense for the remaining days of March may also be accrued on a reasonable basis.

Cash Basis:
The same mobile bill will be recorded as an expense in March only if it is paid before 31 March, allowing it to be included in the same financial year. If the payment is made in April, it will be recorded as an expense in the next financial year, even though the usage relates to the previous year.

Important Points to Remember
The accounting method chosen must be applied consistently for all clients, income, and expenses.

As per ICDS-1, if an Individual or HUF is required to have their books audited under Section 44AB, the accrual basis must be followed for calculating total income for income tax purposes.

How to Choose an Accounting Method
At first, the cash basis of accounting may seem like a way to lower your tax liability. In reality, it usually only delays the payment of taxes rather than reducing the overall tax amount.

Once you select an accounting method, it must be applied consistently. Frequent changes in the accounting method are not permitted, especially if the intention is to reduce or avoid taxes.

In most cases, following the accrual basis is considered more practical unless your income receipts are irregular, uncertain, or unpredictable. The Income Tax Act requires certain taxpayers to maintain books of accounts for income tax purposes, as specified under Section 44AA and Rule 6F.
However, specific income or turnover limits are prescribed, and if your earnings fall below these limits, maintaining books of accounts may not be mandatory.

Note: If you opt for the presumptive taxation scheme, maintaining books of accounts is not required.

Total Taxable Income and Tax Payable
Taxpayers can lower their tax burden by claiming deductions available under Section 80 of the Income Tax Act. For example, Section 80C provides tax benefits on certain eligible expenses and encourages long-term savings by offering deductions on investments made in approved financial instruments.

Net Taxable Income = Gross Taxable Income – Deductions under Section 80
Under Section 80C, you can reduce your taxable income by up to ₹1.5 lakh for the amount actually invested or spent on eligible items.

If your income exceeds the basic exemption limit (₹2,50,000 under the old tax regime and ₹3,00,000 under the new tax regime), you are required to file an income tax return.

Tax Payable by a Freelancer
If your total tax liability during a financial year is more than ₹10,000, you must pay advance tax.

How to Calculate Advance Tax
Add all your receipts to determine your total income.

Deduct expenses that are directly related to your work.

Include income from other sources, such as house property or savings accounts.

Identify the tax slab applicable to you and calculate the total tax payable.

Deduct any TDS or TCS already paid.

If the remaining tax payable exceeds ₹10,000, advance tax must be paid according to the prescribed schedule.

Advance Tax Due Dates
On or before 15 June
At least 15% of the advance tax must be paid.
On or before 15 September
At least 45% of the advance tax, after reducing the amount paid in the previous instalment.
On or before 15 December
At least 75% of the advance tax, after reducing the amount paid in earlier instalments.
On or before 15 March
The entire advance tax amount (100%), after adjusting the tax already paid in previous instalments.

Applicability of GST to Freelancers
Previously, freelancers were subject to VAT and Service Tax on their income. These taxes have now been replaced by the Goods and Services Tax (GST).

If You Sell Goods
GST has replaced the earlier VAT system for goods. The GST rate depends on the type of product being sold. For instance, if you prepare and sell cakes to bakeries, you must charge 18% GST, which is currently the applicable rate for cakes.

If You Provide Services
Most services attract an 18% GST rate. Therefore, freelancers providing services generally need to charge 18% GST to their clients.

Example:
Suppose your total billing to a client is ₹75,000. With an 18% GST rate, the GST amount will be ₹13,500 (75,000 × 18%). The total invoice value will therefore be ₹88,500. The ₹13,500 collected as GST must be deposited with the government.

Important Points Under GST
If your total income from freelancing does not exceed ₹20 lakh, GST registration is generally not required.

If your turnover is below the prescribed limit, you may be eligible to opt for the composition scheme for goods or services.

GST is not applicable on zero-rated supplies such as exports.

Your invoices must follow GST compliance requirements, and GST returns must be filed accordingly.

When Do You Need to Register for GST?
You are required to register for GST if your aggregate annual turnover exceeds ₹20 lakh (₹10 lakh for North-Eastern states).

How to Calculate Aggregate Turnover?
Aggregate turnover refers to the total value of all taxable supplies, exempt supplies, exports, and inter-state supplies made during a financial year, excluding taxes.

How to Make GST Payments?
GST payments can be made online. If the payment amount exceeds ₹10,000, online payment becomes mandatory. GST must be paid to the government either monthly or quarterly depending on your turnover and whether you have opted for the composition scheme.
Delays in GST payment may result in interest charges.

How to File GST Returns
GST returns must be filed either monthly or quarterly based on your turnover and whether you have chosen the composition scheme.
Composition dealers and businesses with annual turnover up to ₹1.5 crore for the supply of goods can file quarterly returns.

For service providers, the turnover limit for quarterly filing is ₹50 lakh.

Once you obtain a GST Identification Number (GSTIN), filing GST returns becomes mandatory.

Getting GST Ready
Using GST-compliant software can make billing and return filing easier. Such platforms help generate GST-compliant invoices, file returns on time, and provide guidance and support for managing GST requirements.

Should Freelancers File TDS Return?
Freelancers may receive payments after tax has been deducted at source (TDS). In the same way, freelancers may also be required to deduct tax at source when making certain payments.

Consider this example:
Roshni is a freelance graphic designer who works with several clients. She receives payment for each project instead of a fixed monthly salary. When clients pay her, they deduct tax at source before transferring the payment. However, she may not always be aware that she may also need to deduct tax when making certain payments.

Many freelancers operate under a business name and maintain a current account for business transactions. From a taxation point of view, they are often treated as small businesses. When Roshni faces tight deadlines, she hires other professionals to help complete the work. In such situations, she is required to deduct tax at source on the payments made to them.

Whenever a freelancer or small business owner pays a professional more than ₹30,000 in a single transaction or in total during a financial year, TDS must be deducted at the rate of 10%. The deducted amount must then be deposited with the government.

However, a freelancer is required to deduct TDS only if their accounts were audited in the previous financial year. Generally, a freelancer’s accounts are subject to audit when the total gross receipts in a year exceed ₹50 lakh. If the receipts are below this limit, there is usually no requirement to deduct TDS.

Therefore, if a freelancer’s annual gross receipts exceed ₹50 lakh and the accounts were audited in the earlier year, TDS provisions will apply to various payments made by the freelancer, including salary and contractual payments.

Freelancers should review the TDS rules to determine whether tax needs to be deducted on specific payments. Once TDS is deducted, it must be deposited with the government, and the freelancer must also file the required TDS returns.

Frequently Asked Questions (FAQs)

1. Do freelancers need to pay income tax in India?
Yes, freelancers are required to pay income tax in India if their total annual income exceeds the basic exemption limit set by the government.

2. How is income tax calculated for freelancers?
Freelancers are taxed under the category of “Profits and Gains from Business or Profession,” and tax is calculated based on total income after deducting eligible business expenses.

3. Do freelancers need to file an Income Tax Return (ITR)?
Yes, freelancers must file an ITR if their income exceeds the exemption limit or if they want to claim refunds or carry forward losses.

4. Which ITR form should freelancers use?
Freelancers generally file ITR-3 if maintaining regular books of accounts or ITR-4 if opting for the presumptive taxation scheme under Section 44ADA.

5. What is the presumptive taxation scheme for freelancers?
Under Section 44ADA, eligible freelancers can declare 50% of their total receipts as taxable income without maintaining detailed books of accounts.

6. Are freelancers required to pay advance tax?
Yes, freelancers must pay advance tax if their total tax liability exceeds ₹10,000 in a financial year.

7. Can freelancers claim business expenses?
Yes, freelancers can claim expenses related to their work such as internet bills, software subscriptions, office rent, travel expenses, and equipment purchases.

8. Is GST registration required for freelancers?
GST registration is required if a freelancer’s annual turnover exceeds the prescribed threshold or if they provide services to clients outside India under certain conditions.

9. Do freelancers need to maintain books of accounts?
Freelancers must maintain books of accounts if their income exceeds the specified limits or if they do not opt for the presumptive taxation scheme.

10. What are the penalties for not filing income tax as a freelancer?
Failure to file income tax returns on time may result in late fees, interest on unpaid taxes, and possible penalties under the Income Tax Act.