Income tax return for Freelancers - A Complete guide
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Welcome, fellow freelancers! Are you ready to tackle the world of income tax returns head-on? As freelancers, managing taxes can sometimes feel like navigating a labyrinth. But fear not! In this guide, we’ll break down everything you need to know about income tax returns for freelancers in simple terms. Let’s dive in!
Understanding Income Tax Returns
First things first, let’s get familiar with what exactly an income tax return is. Simply put, it’s a form you fill out to report your income to the government and calculate how much tax you owe. As freelancers, we’re responsible for handling our taxes differently than traditional employees because we don’t have an employer deducting taxes from our income.
Who is a Freelancer?
A freelancer is essentially a self-employed individual who offers services to clients or businesses without being employed on a long-term contract basis. Instead of working for a single employer, freelancers work independently, often on a project-by-project basis or for multiple clients simultaneously.
Types of Freelancers:
Creative Professionals: This includes writers, designers, photographers, artists, musicians, and other creative individuals who offer their artistic talents and services to clients.
Consultants: Consultants provide expert advice and guidance in specific areas such as business, marketing, finance, technology, or human resources.
Programmers and Developers: Freelance programmers and developers offer their skills in coding, software development, web development, and app development to businesses and individuals.
Virtual Assistants: Virtual assistants provide administrative, clerical, or creative support to clients remotely. Tasks may include email management, scheduling, social media management, and more.
Freelance Professionals in Various Fields: This includes freelancers in fields such as accounting, legal services, healthcare, education, and engineering, among others.
Income Tax Rates
Freelancers are subject to income tax based on the applicable tax rates as per the Income Tax Act. These tax rates vary depending on the individual’s income level and the tax slab they fall under.
Freelancers have the option to choose between two tax regimes:
Old Tax Regime: Under the old tax regime, freelancers can claim deductions and exemptions as per the existing provisions of the Income Tax Act. This regime allows for a wide range of deductions but may result in higher compliance requirements.
New Tax Regime: The new tax regime offers lower tax rates but reduces the number of deductions and exemptions available to taxpayers. Freelancers can choose this regime for a simpler tax structure, although they may forgo certain deductions.
Old Tax regime
| Income Slabs | Individuals of Age < 60 Years |
| Up to Rs 2,50,000 | NIL |
| Rs 2,50,001 – Rs 5,00,000 | 5% |
| Rs 5,00,001 to Rs 10,00,000 | 20% |
| Rs 10,00,001 and above | 30% |
New tax regime for FY 2023-24
| Income Slabs | Income Tax Rates       |
| Up to Rs 3,00,000 | Nil |
| Rs 3,00,000 to Rs 6,00,000 | 5% on income exceeding Rs 3,00,000Â |
| Rs 6,00,000 to Rs 900,000 | Rs. 15,000 + 10% on income more than Rs 6,00,000 |
| Rs 9,00,000 to Rs 12,00,000 | Rs. 45,000 + 15% on income more than Rs 9,00,000 |
| Rs 12,00,000 to Rs 1500,000 | Rs. 90,000 + 20% on income more than Rs 12,00,000 |
| Above Rs 15,00,000 | Rs. 150,000 + 30% on income more than Rs 15,00,000 |
NOTE:
- The income tax exemption limit is up to Rs. 3 lakh for senior citizens aged above 60 years but less than 80 years.
- The income tax exemption limit is up to Rs. 5 lakh for super senior citizens aged above 80 years.
- Surcharge and cess will be applicable
Freelancers can select the tax regime that best suits their financial situation and tax planning objectives.
Presumptive Taxation Scheme (Section 44ADA)
Under Section 44ADA of the Income Tax Act, 1961, freelancers engaged in specified professions, including professionals such as doctors, engineers, architects, interior decorators, technical consultants, and certain other professionals, can opt for the Presumptive Taxation Scheme.
When freelancers choose the Presumptive Taxation Scheme, they are taxed on a presumptive basis, meaning they are deemed to have earned a certain percentage of their gross receipts as their income. Specifically, under Section 44ADA, freelancers can declare 50% of their gross receipts as their income for tax purposes.
Conditions for opting for Presumptive Taxation Scheme (Section 44ADA):
- The total gross receipts of the freelancer must not exceed ₹50 lakhs in the financial year.
- The freelancer must maintain books of account and other documents to support their gross receipts.
Deductions from Income of Freelancer
Let’s explore the various deductions available for Income tax return for Freelancers under different sections of the Income Tax Act:
1. Section 80C:
Section 80C offers deductions on various investments and expenses, including:
- Life insurance premiums
- Equity Linked Savings Schemes (ELSS)
- Contributions towards Public Provident Fund (PPF)
- Payments made towards the principal sum of a home loan (including stamp duty and registration charges)
- Sukanya Samriddhi Yojana (SSY) deposits
- National Savings Certificate (NSC)
- Senior Citizens Savings Scheme (SCSS)
- Contributions towards pension plans like the National Pension System (NPS)
- Tuition fees paid for children’s education
2. Section 80D:
Under Section 80D, freelancers can claim deductions on medical insurance premiums paid for themselves, their spouse, children, and parents. The deduction limit varies based on the age of the insured individuals and the type of policy.
3. Section 80E:
Freelancers can claim deductions on the interest paid on education loans under Section 80E. This deduction is available for a maximum of 8 years or until the interest is fully repaid, whichever is earlier.
4. Section 80EEA:
Section 80EEA provides deductions on the interest paid on home loans for first-time homebuyers. To qualify, the loan must be sanctioned between certain specified dates, and the stamp duty value of the property should not exceed a specified threshold.
5. Section 80G:
Under Section 80G, freelancers can claim deductions for donations made to eligible charitable organizations or institutions. The deduction is restricted to certain specified limits and is subject to conditions prescribed under the Income Tax Act.
6. Section 80GG:
Freelancers who do not receive House Rent Allowance (HRA) from their employers can claim deductions for rent paid under Section 80GG. Certain conditions must be met to avail of this deduction, including not owning any residential accommodation at the place of employment.
7. Section 80TTA:
Section 80TTA allows freelancers to claim deductions on the interest earned on savings accounts held with banks, post offices, or co-operative societies. The deduction is limited to a specified amount.
8. Section 80U:
Under Section 80U, freelancers who are differently abled or disabled can claim deductions. The amount of deduction varies based on the extent of disability.
Conclusion:
Freelancers can avail of various deductions under different sections of the Income Tax Act to reduce their taxable income and optimize their tax liability. By understanding the eligibility criteria and conditions associated with each deduction, freelancers can effectively plan their finances and maximize tax savings while filing their income tax returns.Â
Business expenses
One of the perks of freelancing is the ability to deduct certain expenses from your taxable income. This can help lower your overall tax bill. Here are some common deductions freelancers can take advantage of:
- Home Office Expenses: If you have a dedicated workspace in your home, you can deduct a portion of your rent or utilities, and other related expenses.
- Equipment and Supplies: Are you using a laptop, software, or other tools for your freelance work? You can often deduct the cost of these items.
- Professional Services: Did you hire a graphic designer, accountant, or other professionals to help with your freelance business? You can deduct those expenses too.
TDS for Freelancers
Tax Deducted at Source (TDS) is a mechanism through which the government collects taxes at the source of income. Under Section 194J of the Income Tax Act, 1961, payments made to professionals, including freelancers, for certain specified services are subject to TDS at a rate of 10%.
1. Applicability of TDS for Freelancers:
Freelancers providing professional services such as consultancy, technical services, royalty, non-compete fees, or any other professional or technical fees are liable to have TDS deducted from their payments. This includes services rendered in fields like legal, medical, engineering, accounting, architectural, advertising, and more.
2. TDS Rate and Calculation:
The TDS rate for professional services under Section 194J is 10% if the amount exceeds Rs. 30,000. When a client pays a freelancer for their services, they are required to deduct 10% of the total payment as TDS and remit it to the government on behalf of the freelancer.
For example, if a freelancer receives a payment of ₹50,000 for professional services, the client must deduct ₹5,000 (10% of ₹50,000) as TDS and pay the remaining amount to the freelancer which will be Rs. 45,000.
3. Refund of TDS for Freelancers:
Freelancers can claim a refund of the TDS deducted from their income, similar to salaried individuals. The process for claiming a TDS refund involves filing an income tax return (ITR) with the Income Tax Department. In the ITR, freelancers can declare their total income, including the TDS deducted, and claim a refund if the TDS amount exceeds their actual tax liability.
It’s important for freelancers to ensure that they receive Form 16A or a TDS certificate from their clients, which serves as proof of the TDS deducted. This certificate is necessary for claiming the TDS refund while filing the income tax return.
Advance tax for freelancers
Advance tax is a mechanism through which taxpayers, including freelancers, pay their income tax liabilities in advance, rather than waiting until the end of the financial year.Â
1. Applicability of Advance Tax for Freelancers:
Freelancers are subject to advance tax if their total tax liability for the financial year exceeds Rs 10,000 after accounting for tax deducted at source (TDS).
2. Calculation of Advance Tax:
Freelancers are required to estimate their total income for the financial year, including income from freelance work, professional fees, and any other sources of income. Based on this estimate, they calculate their total tax liability, taking into account deductions, exemptions, and tax rates applicable to their income slab.
3. Payment Schedule:
Advance tax must be paid in four instalments throughout the financial year. The due dates for advance tax instalments are as follows:
- 15th June: 15% of the estimated tax liability for the financial year
- 15th September: 45% of the estimated tax liability less any advance tax paid in the first instalment
- 15th December: 75% of the estimated tax liability less any advance tax paid in the first two instalments
- 15th March: 100% of the estimated tax liability less any advance tax paid in the first three instalments
4. Consequences of Non-payment or Underpayment:
Failure to pay advance tax or underpayment of advance tax may attract interest under Section 234B and Section 234C of the Income Tax Act. Interest is levied on the amount of tax that should have been paid as per the advance tax schedule, but was not paid or paid in insufficient amounts.
5. Tax Planning and Optimization:
Advance tax payments offer freelancers an opportunity for tax planning and optimization. By estimating their income and tax liability in advance, freelancers can plan their finances accordingly and take proactive steps to minimize their tax burden.
Choosing the Applicable ITR form for Freelancer
1. ITR-3:
ITR-3 is the Income Tax Return form applicable to individuals and Hindu Undivided Families (HUFs) who have income from business or profession. Freelancers and consultants who operate their businesses as sole proprietors or as partners in a partnership firm are required to file their tax returns using ITR-3.
Key features of ITR-3 include:
- Sections for reporting income from business or profession, including details of gross receipts, expenses, and profits.
- Provision for reporting income from other sources, such as interest, rental income, or capital gains.
- Schedule for disclosing details of partners in a partnership firm, if applicable.
- Requirement to provide balance sheet and profit and loss account details if the total income exceeds a specified threshold.
2. ITR-4:
ITR-4, also known as Sugam, is the Income Tax Return form specifically designed for individuals, Hindu Undivided Families (HUFs), and firms (other than LLPs) who have opted for the presumptive taxation scheme under Section 44AD, Section 44ADA, or Section 44AE of the Income Tax Act.
For freelancers and consultants who choose the presumptive taxation scheme under Section 44ADA, where they declare 50% of their gross receipts as their income, ITR-4 is the appropriate form to use.
Key features of ITR-4 include:
- Simplified reporting requirements for individuals and businesses opting for the presumptive taxation scheme.
- Sections for reporting presumptive income from business or profession, calculated based on a percentage of gross receipts.
- Provision for reporting income from other sources, deductions, and tax computation details.
Choosing the Correct Form:
Freelancers and consultants must choose the correct ITR form based on the nature of their income, whether they have opted for presumptive taxation, and other relevant factors.Â
For freelancers and consultants, the applicable Income Tax Return forms are ITR-3 and ITR-4, depending on their income sources, business structure, and whether they have opted for presumptive taxation. It’s essential for freelancers to understand the requirements of each form and choose the one that best suits their tax situation.
How to file income tax return for freelancers?
To file income tax returns as a freelancer, follow these simple steps:
Calculate your gross income earned between April 1st and March 31st of the financial year.
Identify and calculate any eligible expenses and deductions for the financial year.
Choose the appropriate ITR form, either ITR-3 or ITR-4, based on your income sources and business structure.
Fill in all required details on the selected form by logging into the Income Tax e-Filing portal.
Consider using A R Dhorajiya & Co. for filing your ITR. We offer affordable pricing plans tailored for freelancers and independent consultants.Â
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Conclusion
Congratulations, you’ve made it through our crash course on income tax returns for freelancers! While taxes may not be the most exciting topic, understanding how to navigate them as a freelancer is crucial for your financial well-being. By staying organized, taking advantage of deductions, and seeking help when needed, you can conquer tax season like a pro. Happy filing!
Remember, income tax return for freelancers is a crucial aspect of managing your finances. Stay on top of it, and you’ll be well on your way to financial success as a freelancer.
FAQs (Frequently Asked Questions)
1. What is an income tax return, and why do freelancers need to file it?
- An income tax return is a form used by individuals to report their income to the government and calculate the tax owed. Freelancers, like any other taxpayer, are required to file income tax returns to comply with tax laws and fulfill their tax obligations.
2. When is the deadline for filing income tax return for freelancers?
- The deadline for filing income tax returns for freelancers in India is typically July 31st of the assessment year (for non-audit cases).Â
3. Which income tax return form should freelancers use?
- Freelancers should use either ITR-3 or ITR-4, depending on the nature of their income, business structure, and whether they have opted for presumptive taxation.
4. What documents and information do freelancers need to file their income tax returns?
- Freelancers should gather documents such as income statements, expense receipts, bank statements, TDS certificates, and any other relevant financial records. They also need details of investments, deductions claimed, and PAN/Aadhaar details.
5. Can freelancers claim deductions on their income tax returns?
- Yes, freelancers can claim deductions under various sections of the Income Tax Act, such as Section 80C for investments, Section 80D for medical insurance premiums, Section 80E for education loan interest, and more.Â
6. What is the Presumptive Taxation Scheme, and can freelancers opt for it?
- The Presumptive Taxation Scheme allows certain eligible taxpayers, including freelancers, to declare a presumptive income based on a specified percentage of gross receipts which is 50%. Freelancers can opt for this scheme under Section 44ADA of the Income Tax Act if their gross receipts are up to Rs. 50 lakhs.
7. How can freelancers file their income tax returns?
- Freelancers can file their income tax returns online through the Income Tax e-Filing portal or seek the help of CA.
8. What are the consequences of not filing income tax returns or filing them late?
- Not filing income tax returns or filing them after the due date may attract penalties and interest charges. It can also lead to legal consequences and restrictions on financial transactions. Therefore, freelancers should ensure timely and accurate filing of their income tax returns.
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