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Freelancer Tax Guide: Maximizing Earnings Legally

  5/22/24 7:41 AM

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  5/22/24 7:41 AM   |

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As a freelancer in India, it is important to stay on top of your finances and understand the tax regime carefully. From understanding the types of taxes to learning about deductions, it will help you in your freelancing career, particularly when it comes to building your savings by maximizing investments and minimizing tax liabilities.

Let us explore some key aspects like income of freelancers, accounting processes, taxable income calculations, and more in this article.

Freelancing Income

As per the Income Tax Act, any earning through exhibiting your intellectual or manual capabilities is considered earnings from a profession. This earning will be taxed under the category “Profits and Gains from Business or Profession". The gross earnings will be the accumulation of all receipts you received throughout the year in carrying out the profession.

Process of Accounting

For freelancers looking to assess their taxable income and manage their revenues and costs, there are two methods available. They include the accrual basis and the cash basis of accounting. The accounting technique, if chosen once, needs to be followed for years.

Determining Taxable Income

Here are some key aspects to help you determine taxable income.

  • Presumptive Tax Calculation: If a freelancer's gross receipts are less than Rs. 50 lakhs, their income may be estimated under Section 44ADA. In this case, 50% of gross receipts equal the taxable income. If someone falls under this category, they are exempt from having to keep books of accounts and have them audited by a certified public accountant.
  • Net Taxable Income from Profit & Loss Account: A freelancer may keep books of accounts if his gross revenues exceed Rs. 50 lakh annually or if he believes his net profit is less than half of his gross receipts.

Taxable Income = Gross Receipts – Expenses incurred for Business

TDS Deductions for Freelancers

Most clients deduct TDS from the freelancers' fees. When filing their ITRs, freelancers have the option to declare the TDS that has been deducted. The details about TDS deducted are available on Form 26AS. This form on the Income Tax portal provides the total amount of TDS deducted for the year.

Tax in Advance

When the total amount of taxes payable is Rs 10,000 or more, the freelancer is expected to make quarterly payments. This is an advance tax, which is paid on a quarterly basis.

First, all the receipts are aggregated, costs are paid, and TDS is subtracted. Then, profits from additional sources, such as capital gains, interest income, and income from real estate, are

added. The amount is then computed based on the tax slab to which they are assigned. If the tax amount is greater than Rs 10,000, then you must pay the advance tax by the due date.

GST Applicability

Freelancers were previously required to pay VAT and Service Tax. However, GST is now the method of taxation and applies on the goods or services that you provide. As a result, freelance work is included in the definition of service. Thus, most of the services are subject to 18% GST. CGST, SGST, and IGST are payable by freelancers based on the location of service.

Even if the company operates online, there is no GST exemption available. Bloggers are also subject to GST laws, whether they are selling space on their blogs within their state or outside of it. Services must be registered under the GST Act if the total annual value of services rendered exceeds Rs. 20 lakh. In Uttarakhand, Jammu & Kashmir, and Himachal Pradesh, the limit is set at Rs. 10 lakhs. In addition, companies can claim input tax credits on the goods and services they utilize for their operations. This will reduce their GST liability.

Tax Saving Tips for Freelancers

If you are a freelancer in India, here are a few tax saving tips that you may find useful.

Benefits of a Home Office:

You can deduct a portion of your rent or utility costs if you work from home. These can be easy savings; just figure out how much space you use for work as you need to specify the exact area that you are using for commercial purposes.

Increased Business Expenses:

You can deduct every penny you spend on your business, even the cost of software and comfortable chairs. Your taxable income will decrease if you keep such receipts nearby.

Advantages of Health and Life Insurance:

Are you paying for your medical coverage? You may be able to receive a tax deduction for the health insurance premium that you pay annually, under Section 80D of the Income Tax Act. Additionally, you can also get tax deductions (up to ₹1.5 lacs, under Section 80C) on the annual premiums paid towards a life insurance policy, or any other Section 80C investment. Note that these deductions are only available under the old tax regime.

Retirement Savings:

Creating an inheritance for the future? Your taxable income may decrease if you make contributions to a retirement plan such as the NPS.

Learn More, Save More:

Purchasing workshops or courses for work purposes? You can benefit from both tax savings and enhanced expertise by deducting those expenses.

Conclusion:

As a freelancer it is important that you decode tax regulations to ensure an effective financial standing. This will help you maximize their earnings while remaining within the bounds of the law. Learn more about income and tax calculations in order to create viable financial plans for the future. You can also consult a tax specialist/advisor for more guidance if necessary. This will help you ensure more savings in the long run, which will usher in more prosperity without a doubt.

 

Chirag Iyer - BFSI Enthusiast

Chirag is a writer and an avid reader who loves to drink coffee! His other interests include boxing, karate, and singing.

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