Freelancing is an enticing profession commonly associated with the notion that it yields a substantial income. In India, all income above a specific threshold is taxable, including that of freelancers. The Income Tax Department of India classifies freelancer income under the category “Profits and Gains of Business and Profession.”
Any freelancer earning income in a financial year has to file an Income Tax Return (ITR). In this article, we will explain all details related to income tax for freelancers and how to file ITR and pay these taxes. First, let’s 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. Common freelancing professions include 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 slabs for freelancers. A key benefit freelancers enjoy is the ability to deduct their business expenses from their income. Depending on the freelancer’s income, the income tax slabs may differ, and these must be appropriately assessed before making tax payments.
Income Components for Freelancers
The assessment of freelance taxes is based on the sum of all funds received by a freelancer for their work. Only income received in their bank account from freelance operations is considered. This income is known as the gross receipts from freelancing. Any loan payment received from friends or relatives does not count as freelance income. It’s important to note that any income from fixed deposit interest, rent from property, etc., is not considered part of freelancing income.
Taxation Regime for Freelancers
All freelancers must pay their income taxes as per the applicable slab rates based on their income range. They are also required to file their ITR under the presumptive taxation scheme as per 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 a freelancer’s gross receipts for a financial year exceed INR 1 crore, they may be required to get their accounts audited by tax authorities. Freelancers can file their ITR either using ITR Form-4 under the Presumptive Taxation Scheme or ITR-3 after claiming all applicable deductions.
Applicable Tax Deductions for Freelancers
As mentioned before, freelancers have the flexibility to deduct all their business expenses from their freelance income. These deductions are permissible under Sections 80C to 80U. A freelancer can claim all these deductions while filing their ITR. These deductions are:
- Section 80C allows deductions for multiple investments like life insurance premiums, payment for the principal amount of home loans, pension 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 deduct interest paid on education loans.
- Section 80EEA provides deductions for interest on home loans for first-time homebuyers who are freelancers.
- Section 80G of the Income Tax Act allows deductions for donations towards social causes.
- Section 80GG permits freelancers to claim income tax deductions for house rent paid.
- Section 80TTA allows deductions on interest earned from savings accounts for freelancers.
- Section 80U allows deductions for disabled individuals.
ITR Filing Process for Freelancers
Once you assess your tax payments by applying the approved deductions from your freelance earnings, you can easily file the ITR when it is due. The ITR filing process 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 that can be claimed from your earnings.
Select the relevant ITR form for your tax payment. You can either choose ITR-3 or ITR-4, as applicable, and fill out all 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. Income tax rules for freelancers apply to individuals providing services such as writing, software development, and other fields. As mentioned above, freelancers benefit from utilizing all the applicable deductions to arrive at taxable income. Freelancers can file either ITR-3 or ITR-4 based on their specific situation and follow the straightforward procedure discussed above. Either way, they will comply with the legal process of filing ITR and diligently make their tax payments.
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