Income tax for Freelancers| North Loop Official Blog
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27 Dec 2020

Income tax for Freelancers

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What is life like as a freelancer in India?

Being a freelancer in today’s world has its own set of perks, with one of the main ones being flexibility, which is why close to 15 million people in India have chosen to freelance as a preferred career option. In India, freelancers enjoy a lot of advantages, such as flexible schedules, freedom to work from wherever you’re comfortable, freedom to work on a project of choice, etc., coupled with a pay scale almost on par with full-time employees.

Freelancer Earning-

As a freelancer, earning money can be slightly more overwhelming as you may not be able to find work throughout the year. You also miss out on a lot of benefits, such as insurance coverage, allowances, employee provident fund, etc.

There are plenty of freelancing jobs in India and freelancers mainly earn income from writing work (content writing), digital marketing, web development, graphic design, etc.
Companies pay freelancers on a project/assignment basis, hence you would not be able to enjoy any benefits provided by the company. Any income you earn will be recorded as Profits and Gains from Business or Profession and is taxed at applicable rates.

While calculating income, apart from income received through freelancing work, you would need to include income from other sources as well, such as income from property, income from investments, etc.

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How much freelancers earn in India-

How much a freelancer can earn can depend on the type and duration of an assignment/project. On average, freelancers earn anywhere between Rs 20,000 and Rs 1 lakh. Developing your skills and charging a reasonable price can go a long way in finding freelancing jobs.

Taxation on income received by freelancers-

There are a few expenses that you can claim as deductions while calculating your income-

1. Property Rent only if the property is meant for work-related purposes.

2. Repairs of a rented property/your business property.

3. Depreciation of capital assets, as per the Income Tax Act.

4. Office expenses

5. Travel expenses.

Conditions to be satisfied while calculating these expenses-

1. All expenses need to pertain to freelancing work.

2. All expenses should be incurred within a tax year.

3. All expenses recognized by the Income Tax Act can be claimed as deductions.

In case an asset is used for both personal and professional purposes, only a part deduction as mandated by the IT Act can be claimed.

Books of Accounts-

There are two methods of calculating your income- Accrual Basis and Cash Basis.

Accrual Basis-

Income and expenses are to be recorded in the books of accounts when you are obligated to meet expenses or receive money. Under accrual basis, taxes need to be paid in line with transaction records in the books of accounts and not when the actual income is received.

Cash Basis-

Income and expenses are to be recorded in the books of accounts only after they are fulfilled/settled and in this case, taxes too need to be paid post receipt of income.

Choosing between these two methods can get quite confusing at times. Ensure that you do not change your method of accounting once you pick one. And remember, choosing a cash basis of accounting only delays your tax outgo. Go ahead with a cash basis of accounting only when your income is irregular.

Section 44AA and rule 6F have a couple of guidelines for maintaining your books of accounts, so ensure that your records comply with the same.

Income Tax Slabs for Freelancers-

The same income tax slabs applicable to full-time employees apply for freelancers as well. The income tax slabs are as follows-

Income Tax Slab Rates (Freelancers)
Annual Income (Rs.)Tax Slab
Rs 2.5 lakhsNIL
Rs 2.5 to 5 lakhs10%
Rs 5 to 10 lakhs20%
Above Rs. 10 Lakhs30%

Advance Tax-

As a freelancer, if your total tax liability exceeds Rs. 10,000, you are required to pay advance tax. This is a type of provision applicable to freelancers to pay taxes at frequent intervals rather than a one-time lump sum payment every year. In case you’re unable to pay advance tax, an interest as per Section 234B and Section 234C of the Income Tax Act is applicable. You can pay your advance tax here.

GST-

While selling goods, the GST rates vary depending on the type of goods sold. The composition scheme is applicable when selling goods. GST does not apply to exports.

While providing services, you need to charge an 18% GST on most freelancing services rendered to clients. Here, the composition scheme does not apply. GST only applies to freelancing services if your income exceeds Rs. 20 Lakhs.

Based on your turnover and the choice of composition scheme, GST needs to be filed either monthly or quarterly. GST needs to be filed online if your payments exceed Rs.10,000. Any delays in filing GST attracts an interest rate as mandated by the government.

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This publication is provided for general information purposes only and is not intended to cover every aspect of the topics with which it deals. It is not intended be advice. You must obtain professional advice before taking, or refraining from, any action on the basis of the content in this publication. The information in this publication does not constitute legal, tax, investment or other professional advice from North Loop or its affiliates. We make no representations, warranties or guarantees, whether express or implied, that the content in the publication is accurate, complete or up to date. All opinions expressed do not reflect the views of North Loop nor are endorsed by North Loop.