Are you a freelancer and don't know what to do about taxes? If yes, then this article is for you.
Tax filing is simpler for your friends with full-time jobs. However, as a freelancer, you must have guessed that no one will remind you about filing your Income Tax Returns, and you need to take the initiative yourselves.
The last date for tax filing for freelancers in India is 31st July 2023.
In this article, we will look at the various aspects freelancers in India need to consider before filing their tax returns.
Who is a freelancer?
A freelancer is a person who is self-employed and works with multiple clients. A freelancer can choose the projects that they want to work on. Software developers, content writers, web designers, SEO consultants, photographers, UI/UX designers, video editors, fashion designers etc. can be called freelancers.
Freelancer and Income Tax
As a freelancer, the income generated is considered as "profit and gains from business and profession". Typically, you will see that your client deducts 10% of the total invoice amount before crediting your bank account. It is because the income is taxed under Section 194J, which allows clients to deduct 10% TDS towards the payment of fees for professional and technical services against your PAN. Your client pays this money to the government.
If you are new to this industry, it will be better to ask for Form 16A after every quarter to verify if your client has transferred the amount to the government.
You can also check the total TDS deduction against your PAN in your annual tax statement when filing your ITR. It is important to remember that a client might only charge TDS if the total billing amount in one financial year is 30,000 or is expected to be below that limit. If the limit exceeds, the client has to charge TDS on all the previous invoices as well.
Moreover, suppose you are indirectly associated with the client through a marketplace. In that case, i.e., you are a subcontractor, your income will be taxed under 194C, which is 1% of your bill amount.
It is important to file your ITR even if your freelancing amount is less than the taxable limit or your payments are in cash. It can act as income proof when applying for loans. Unlike our full-timer counterparts, we don't have the luxury of showing monthly salary slips as income proof.
And, if you paid more taxes through TDS or Advance Tax, then the authorities will refund the additional amount to you.
Refund= Taxes paid – Total tax liability on the current financial year's income
Which ITR Form to choose?
Choosing the correct ITR form is one of the critical aspects when filing tax returns as a freelancer. If you have worked full-time for a few months and have taken small freelance projects, you can file ITR-1. In addition to the salary income, you can add the income you received as a freelancer as an additional source of income.
But if it is a recurring income and is a considerable sum, it would be better to include it as a business income along with your salary income.
However, if you have been a freelancer for the entire financial year, filing your ITR under ITR -3 or ITR-4 will be better. Also, one thing is that you can opt for the Presumptive Taxation Scheme under Section 44ADA of the Income Tax Act, 1961.
Presumptive Taxation Scheme
The presumptive taxation scheme is meant for freelancers so that you don't have to maintain books of account, and your accounts need not be audited. However, your income needs to be below Rs. 50 lakhs, and you need to show at least 50% of your gross receipts as income.
This scheme might help freelancers as we invest money in laptops, stationery items, client meetings, and office space. However, when you opt for this scheme, you won't be able to claim for other expenses such as electricity or purchasing a laptop.
You can opt for this scheme under both ITR-3 and ITR-4.
Choosing ITR-3 or ITR-4 as a freelancer will depend on a few elements. If you have capital gains, whether through the sale of mutual funds units, receiving rental income from more than two properties, or earning income as a partner in a firm, you must file under ITR 3. Here, both presumptive (non-audit) and audit cases can be filed.
ITR 4 is applicable for freelancers whose income is less than Rs.50 lakhs with no capital gains and rental income from one property.
Steps to File ITR
- Calculate your gross income from 1st April to 31st March. Maintaining a record of your expenses and income from various clients would be ideal. You can take a look at your income by downloading 26AS from the income tax portal.
- Select the ITR form that suits you.
- Fill in the necessary details, such as taxable income, deductions, and expenditures, or you can take help from a tax consultant to help you with the process.
- Fill in the necessary details such as taxable income, deductions, expenditures, etc.
Filing your ITR as a freelancer is important as it helps you to get the required tax refunds. Moreover, it also acts as income proof which can help you in the future. If you are unsure, it would be best to get help from a tax consultant.
Padmaja Choudhury is a freelance financial content writer. With around six years of total experience, mutual funds and personal finance are her focus areas.