Freelancing is an enticing profession commonly associated with the notion that it yields a substantial income. But in India, every income above a specific range is taxable, and so is the income of the freelancer. The income tax department of India considers the income of the freelancers under the category “Profit and Gains of Business and Profession.”
Any freelancer earning an income in a financial year has to file an Income Tax Return (ITR). In this article, we will break down all details linked with income tax for freelancers and how they can file ITR to pay these taxes. Before digging deeper, read on to understand who a freelancer is
Who Is a Freelancer?
A freelancer is an individual who is self-employed in their profession and has the flexibility to choose the companies or projects they wish to work on. Some common freelancing professions that most people may associate with are writers, photographers, software developers, gym instructors, interior decorators, fashion designers, bloggers, etc.
Like any salaried income, freelance income is also taxable as per the applicable tax slab for freelancers. One of the top-tier benefits that freelancers get in their tax payments is the permit to deduct their freelancer expenses from freelancers’ income. Depending on the income of the freelancer, the income tax slabs may differ, which must be assessed appropriately by the freelancer before indulging in tax payments.
Income Components of Freelancer
The assessment of freelance taxes is based on the sum of all funds received by a freelancer for their work. Only the income received in your bank account from the freelance operations must be summed up. This income is known as the gross receipts from the freelancing operations. Any loan payment received from friends or relatives is not accountable as freelance income. It is crucial to keep in mind that any income from fixed deposit interest, rent from property, etc. is not a part of freelancing income.
Taxation Regime for Freelancers
All freelancers must pay their income taxes as per the applicable slab rates on their specific income range. They also have to file the ITR for freelancer for presumptive taxes under section 44ADA of the Income Tax Act, 1961. The presumptive taxation scheme permits freelancers to pay income tax on half of the gross annual income not exceeding INR 50 lakhs. Here are the updated tax slabs for income tax for freelancers:
| Income Range | Old Tax Regime for Freelancers |
New Tax Regime (until 31st March 2023) |
New Tax Regime (From 1st April 2023) |
|---|---|---|---|
| ₹0 – ₹2,50,000 | – | – | – |
| ₹2,50,000 – ₹3,00,000 | 5% | 5% | – |
| ₹3,00,000 – ₹5,00,000 | 5% | 5% | 5% |
| ₹5,00,000 – ₹6,00,000 | 20% | 10% | 5% |
| ₹6,00,000 – ₹7,50,000 | 20% | 10% | 10% |
| ₹7,50,000 – ₹9,00,000 | 20% | 15% | 10% |
| ₹9,00,000 – ₹10,00,000 | 20% | 15% | 15% |
| ₹10,00,000 – ₹12,00,000 | 30% | 20% | 15% |
| ₹12,00,000 – ₹12,50,000 | 30% | 20% | 20% |
| ₹12,50,000 – ₹15,00,000 | 30% | 25% | 20% |
| Above ₹15,00,000 | 30% | 30% | 30% |
If the gross receipt of the freelancer for a financial year exceeds the limit of INR 1 crore, then the freelancer may have to get the audit done by the tax authorities. Freelancers can file the ITR either via the ITR form-4 under the Presumptive Taxation Scheme or ITR-3 after subtracting all the possible deductions.
Possible Tax Deduction for Freelancers
As mentioned before, freelancers have the flexibility to deduct all their freelancing expenses from their freelancing income. These deductions in the income are approved as per sections 80C to 80U. A freelancer can claim all these deductions while filing the ITR for freelancers. These deductions are:
- Section 80C approves the deduction on multiple investments like life insurance premiums, payment for the principal amount of home loans, pensions plans, Equity Linked Saving Scheme (ELSS), Sukanya Samriddhi Yojana (SSY), Senior Citizens’ Saving Scheme (SCSS), etc.
- Section 80D allows deductions on medical insurance premiums.
- Section 80E permits freelancers to include interest on education loans as tax deductions.
- Section 80EEA highlights the deduction interest on home loans for freelancers owning a home for the first time.
- Section 80G of the Income Tax Act allows exclusions for deductions made towards donations for social causes.
- Section 80GG permits freelancers to claim income tax deductions on paid house rent.
- Section 80TTA includes interests in the savings accounts of the freelancers.
- Section 80U permits the deductions for disabled individuals for assessing income tax payments.
ITR Filing Process for Freelancers
Once you assess your tax payments by applying the approved deductions from your freelance earning, you can easily file the ITR when it is due. The process of filing ITR for freelancers is simple and can be done by following the steps given below:
- Assess the total freelancing income earned during the financial year beginning from April 1st to March 31st of the next year.
- Calculate your applicable deductions and expenses, which you can claim from your earnings.
Select the relevant ITR form for freelancer tax payment. You can either go for ITR-3 or ITR-4, as applicable and fill out all the necessary information at the Income Tax e-Filing portal.
Conclusion:
The Income Tax Act of 1961 requires freelancers earning an income above INR 2,50,000 to pay income taxes. The income tax for freelancers applies to any individual selling their freelancing services in writing, software development, and others. As mentioned above, freelancers benefit from accounting for all the applicable deductions to arrive at taxable income. Freelancers can file either ITR-3 or ITR-4 as relevant to their preference and follow the straightforward procedure discussed above. Either way, they will comply with the legal process of filing ITR and make their tax payments actively.
