Tax:Freelancers provide their virtual expert services to national and international clients. Working from their comfort zone in parks, houses, or cafes freelancing has provided one of the best self-employment opportunities so far. Freelancer’s income depends upon various factors like the project they undertake, rates they charge per hour, and the service provided by them. In India an “average full-time freelancer earns 20 lakhs per annum whereas as top 23% freelancers earn 60 lakhs per annum” says PayPal.
Applicability of tax
As per the norms of the Income-tax Act freelancers are liable to pay taxes under “profit and gains from business and profession”. Nirmala Sitaraman says “any income that you own by displaying intellectual or manual skills is income from a profession according to income tax laws in India”. Earlier, freelancers were liable to pay service tax and VAT however this year they are liable to pay CGST, SGST, and IGST that is 18% GST for their services.
Applicability of GST according to income
GST is applicable according to the income and state of the freelancer. If the income earned through freelancing is more than 10 lakhs per annum in Himachal Pradesh, Uttrakhand, and Jammu Kashmir then their income should be registered under GST Act. Whereas it is 20 lakhs in the case of other states in India.
Techniques of calculating tax
There are two techniques of calculating the tax for freelancers which depend upon their income and expenses and evaluates their taxable income.
(1) Net taxable income from profit and loss:- Under this category one can maintain books of accounts if he thinks that his gross income is more than 50 lacs per year and his net profit is less than half of his gross profit.
Net taxable income= Gross taxable income – Deductions
(2) Presumptive tax calculation:- In this case, if the freelancer’s income provided by the gross profit is under 50 lacs per annum he doesn’t need to maintain books of accounts.
NOTE:- There should be only one technique opted for filing GST. As they have to follow the same for next financial years and cannot be changed in any consecutive years to cut cost the tax slabs.
Techniques of tax deduction
(1) Claim expenses:- One needs to show all the expenses that occurred while providing services to the customers. It can be any expenses such as fare paid to meet customers or any other asset purchased for providing services.
(2) TDS deduction:- Many customers deduct TDS from the freelancer’s fees you can check the TDS deduction from form 26AS and submitted while register in GST showing the combined expenses and TDS deduction would reduce the tax liabilities.
Since it is declared that Freelancers are liable to pay taxes under GST Act they have to file Income Tax Return file ( ITR-3 and ITR-4). If your gross profit exceeds more than 50 lakhs per annum then ITR-4 must be filed. Freelancers work on different assignments their source of income is according to the service they provide nationally or internationally. Therefore, their tax computation can be complicated it is recommended to take expert advice for avoiding any tax penalties and avail maximum tax deduction benefits.
What is advance tax?
If your tax liability is more than 10,000 for the financial year then you are required to pay taxes every quarter. This is known as advance tax.
How to calculate advance tax?
- Check your total income and the tax slab you belong.
- Add all your receipts and calculate your total income.
- Subtract your expenses.
- Then add your other source of income such as rental income, interest received, dividends, etc.
- Deduct TDS
- Combine all your income and check the tax slab you belong to.
- If the amount exceeds more than 10,000 then you are liable to pay taxes quarterly.
Advance tax can be paid in the following ways:-
- To pay online through the official website of the IT department. Here are steps to pay taxes https://www.incometaxindia.gov.in/Pages/tax-services/pay-tax-online.aspx
- To file challan and submit it to your nearest visiting bank.
Penalties are charged under non-payment of tax.
Edited by Sanjana Simlai.