We are living in difficult, uncertain times. It is common to hear news of companies firing their employees. It has become even more scary after the advent of AI and how it can take up the bulk of the current jobs.
As a result, many employees are also working on their side hustles and taking up freelancing opportunities to supplement their income and be prepared for the future. Moreover, you could have freelanced for a few months and worked full-time for the rest of the year.
If you are one of them, then this article is for you.
If you have taken any freelancing work along with your full-time work, it will be better to show it as a business income. If your clients deducted tax i.e., Tax Deducted at Source (TDS), your income from your professional services will be shown on your 26AS form. Typically, clients will deduct TDS of 10% under section 194J for your professional services. You will see the TDS deductions from your employer and clients on the 26AS form.
Just like you get Form 16 from your employer, you will receive Form 16A from your clients. These 16A forms will help you verify if your clients have transferred the TDS that they deducted from your bill amount to the government. If not, then you need to have a word with them.
Moreover, it is seen that many people who freelance with their day job, take the freelance income in their family member’s bank account. As a result, the client will charge TDS against your family member’s PAN. However, it can create issues during tax filing if their income is above the taxable limit, as they must show it as business income.
If you have foreign clients but work from India, the income you receive for your work must also be added to your overall income. However, if there is a tax treaty between India and the country of your client, then the tax liability may come down.
Importance of showing your freelancing income
You may have second thoughts about showing your freelance income, but if your clients deducted TDS against your PAN, there is no way to hide it.
It is essential to file ITR and include your freelancing income, as you might get a refund if higher taxes have been deducted than your liabilities.
Here are the steps that you need to follow:
1. Calculate your total income
You can easily calculate the amount that you have earned as an employee. However, it might be a little tricky if you haven't kept track of your freelancing income. You can look at Form 26AS to check your income against which clients have deducted TDS. However, some clients may have paid the money through UPI or cash or haven't deducted any TDS as the total amount they paid you within the financial year was less than ₹30,000. However, it is also essential to add this income when filing ITR.
2. Choose the right ITR form
If you had no business income, you could have opted for ITR-1. But, in this scenario, you must opt for ITR-3 or ITR-4 form. You can choose ITR-4 if you don’t have any capital gains from your investments, such as mutual funds or stocks, and you don’t earn income from more than one property. If you have capital gains, you need to opt for ITR-3.
Under ITR-3 and ITR-4, you can add your salary and freelancing income. But you don’t have the option to add your business income under ITR-1. The ITR-1 form has a specific section designated for including additional sources of income, but this is solely for interest and dividends or any other supplementary income.
However, if your clients deducted TDS, adding the freelancing income under ‘other sources of income’ will be challenging. So, it will be best to file ITR- 3 or ITR - 4.
3. Add your tax-saving investments
If you opt for the old tax regime, you can utilise the different tax-saving investments and other elements to reduce your taxable income. Moreover, you can also take the additional tax deduction of Rs.50,000 by investing in National Pension System (NPS), which is primarily available for employees.
4. Opt for the presumptive taxation scheme
As a freelancer, you might have paid electricity bills, wi-fi, and cab fares to visit clients, rented office space, or even paid a monthly fee to work from a co-working space. Hence, you can opt for the presumptive taxation scheme under Section 44ADA if your freelance income is less than Rs.50 lakhs. Here, 50% of your gross receipts will get registered as your freelance income. As a result, your total income comes down. However, it is essential to note that when you opt for the presumptive taxation scheme, you won’t be able to claim expenses on stationery etc.
5. Fill out the relevant form or get professional help
The next step would be to log in to your account and file the relevant ITR form. However, if you have second thoughts and don't know how to take it forward, you can consult a tax professional to help you file your ITR without any issues, as ITR-3/ITR-4 is more complicated than filing an ITR-1 form.
When filing your taxes as a full-time employee, it is important to properly report your income from part-time jobs, freelance work, or online businesses. By following the steps outlined in this article, you can accurately calculate your income, choose the right ITR form, add tax-saving investments, and opt for the presumptive taxation scheme if necessary. And if you're unsure about how to proceed, consider consulting a tax professional for guidance.
Padmaja Choudhury is a freelance financial content writer. With around six years of total experience, mutual funds and personal finance are her focus areas.