How are Freelancers Taxed in India?

If you’re a freelancer in India, you know that taxes can sometimes feel like a maze. With multiple forms, rates, and exemptions to navigate, it can be overwhelming. But don’t worry! This blog will help you easily understand how taxes work for freelancers and show you exactly what you need to do to stay compliant while maximizing your savings.

 Income Tax: What You Need to Pay

It is important for freelancers to understand that they, like every other independent worker, are liable to pay his or her income tax on the income earned. The amount you pay depends upon the salary you receive per financial year (April to March.)

India has a progressive income tax structure that suggests the tax on your earnings increases as the amount increases. Below is the income tax slab for the financial year 2024-25:

Additionally, some cesses and surcharges might apply based on your total taxable income.

Goods and Services Tax (GST)

As per GST rules, if your gross business income from freelancing is more than ₹20 lakh (₹10 lakh for special category states), then it is compulsory to register for GST. Based on the description of the services you provide, you will find that GST applies and has to be charged on all your invoices.

However, if the total turnover for any financial year is less than the said threshold limit, then the registration for GST becomes voluntary.

Tax Deducted at Source (TDS) for Freelancers

Tax deduction at source or TDS is a means by which your clients collect their taxes beforehand. Under this system of deduction, the person or company that is giving you the payment for the services that you are offering will withhold the tax from your payment and will then forward the tax to the government. The applicable amount of tax is determined by the nature of your service as well as the perceived worth of your pay.

When is TDS Applicable to Freelancers?

TDS is applicable to freelancers if their annual payment from a client exceeds the following thresholds.

1.  Section 194J: This section relates to payments made in the course of professional and technical services. For consultancy or legal or accounting services, TDS is charged 10% of the payment made for such services if they exceed ₹ 30000 in a year.

2. Section 194C: If you are permitted to deduct the contractual services, then the allowable rate is much lower, 1% for individual/HUF and 2% for others, but only where payments to the contractor exceed ₹ 30,000 per annum.

Process to File Taxes as a Freelancer in India

Easy Process for Freelance People for Filing Tax Returns in India

Step 1: Choose the Correct ITR Form

•   ITR-3: In the case of the business or profession carried out by an individual or any Hindu Undivided Family (HUF).
•  ITR-4 (Sugam): In cases of any loss incurred at the block level by an individual, HUF or any firm (other than LLP) accepting the presumptive taxation scheme US 44ADA.

Step 2: Prepare Your Documents

Make sure you have the following documents ready for filing:

•  Bank Statements
•  Form 16A (if TDS is deducted)
•  Books of Accounts
•  Invoices
•  Investment Proofs
•  GST Returns (if applicable)

Step 3: Calculate Your Total Income

Step 4: If you are eligible, then opt for Presumptive Taxation Scheme. If your gross receipts are up to ₹50 lakh, you have an option of the presumptive taxation regime under Section 44ADA, where 50% of the turnover is taxed.

Step 5: Sign Up for Income Tax e-Filing Portal

If you have not already done so you can registrations on the Income Tax e-Filing Portal.

Step 6: Login and Select the right ITR form

On the home page, after a successful log in choose the right ITR form according to your income and your filing status.

Step 7: Upload Your Completed Form

Step 8: Verify Your ITR

Upon filing the form, the user must then validate the form by either Aadhaar OTP or through Net Banking or by physically sending a copy of the signed ITR-V form to the Income Tax Department.

Claiming Tax Deductions and Exemptions

Freelancers are eligible for various tax deductions under the Income Tax Act, which can help reduce their taxable income. Here are some common tax deductions available to freelancers:

Advance Tax Payments

If your tax liability exceeds ₹10,000 in a year, you’ll need to pay advance tax in four installments throughout the year. These are due on:

• June 15
• September 15
• December 15
• March 15

Failure to pay advance tax on time may result in penalties and interest.

Freelancer Tax Exemptions

Freelancers can take advantage of several tax exemptions to reduce their tax liability:

1. Income Below ₹2.5 Lakhs: You pay no tax if your total income (from freelancing and other sources) is less than ₹2.5 lakh.
2. Section 44ADA: In this regime, the entire receipt or turnover, as the case may be, is computed as the gross income and, thus, eases the journey of freelancers who earn up to ₹50 lakh gross in a year.
3. HRA Exemption: Even if freelancers who are paying rent for their house or apartment do not receive HRA, they can claim deductions under Section 10(13A).
4. Family Pension Exemption: Family pension tax up to ₹ 15,000 under section 57 tax exemption.
5. Long-Term Capital Gains (LTCG) Exemption: Tax exemption of up to ₹ 1.00 lakh on the income arising out of the long-term capital gain from the stocks or mutual funds and other such securities, at a tax rate of 10% in case of the amount exceeding ₹ 1.00 lakh.

Conclusion

Freelancing can be a rewarding career path but has specific tax implications. To minimize your tax liabilities, you need to understand the various taxes that are charged to your income, ensure that you keep good records, and, best of all, take advantage of tax exemptions or deductions.

Due to this, the best option is to get the advice of a qualified tax consultant or CA to help you file your taxes. Being aware of changes and their requirements will help you stay on top of things you need to do as a freelancer to grow your business!