Not working as a full-time employee? Doesn’t matter. Freelancers are also liable to pay income tax. Any income earned from a profession requiring to display intellectual or manual skills is taxed under the head ‘Profits and Gains from Business or Profession’ in the Income-tax Act. 

A freelancer is recommended to collect all their income through banking channels to ease the information gathering process. To calculate the gross income they then just have to add all the receipts shown on their bank account statement. 

If the amount of money you earn exceeds the income tax exemption limit, you need to file the return and pay the tax. The limits are the same for every individual, hence freelancers should also consider the following rates for calculation purposes:

Table 1 showing Income Tax Taxation Slabs (under the old regime)

Income Slab (In Rs.)Tax rate 
0 – 2.5 lakhs
2.5 – 5 lakhs10%
5 – 10 lakhs20%
> 10 lakhs 30%

Table 2 showing Income Tax Taxation Slabs (under the new regime, FY 2020-21)

Income Slab (In Rs.)Tax rate 
0 – 2.5 lakhs
2.5 – 5 lakhs5%
5 – 7.5 lakhs10%
7.5 – 10 lakhs15%
10 – 12.5 lakhs20%
12.5 – 15 lakhs25%
> 15 lakhs30%

The government has come up with the new tax regime as stated above. This is an optional tax regime. The option to be exercised on or before the due date of filing return of income for AY 2021-22. A taxpayer with business income has an option to withdraw once after choosing the new tax regime and will post follow the regular income tax slabs. Also note that any individual, opting for the new regime, needs to give up certain exemptions and deductions. 

Under the Income-tax Act, for the taxpayer following the old tax regime, the government allows certain deductions of specific expenses directly related to their job/profession. Deductions pertaining to the freelancers are: 

  • Rent paid on property hired for carrying out work
  • Costing of repairs paid by you on the rented property or owned property
  • Repairs specific to your laptop, printers, and other equipments
  • Expenses related to purchasing a printer, office supplies, your monthly telephone bills, internet bills, and conveyance expenses
  • Traveling cost within or outside India, carried with the purpose to meet your clients
  • Other expenses like meal, entertainment or hospitality expenses
  • Cost of apps purchased in relation to testing your product and domain registration
  • Money spent  in regards to client meetings, over dinner, or gone for any outing exclusively with the objective of acquiring new business or for holding on to existing business
  • Local taxes and insurance on owned business property

Presumptive Method of taxation

A scheme only available to businessmen previously is now extended to freelancers.  Any Indian resident liable to pay Income-tax working in the prescribed profession (including engineering, and technical consultancy) with gross income less than Rs. 50 lakhs in a FY, has an option to pay tax on presumptive basis only for the income earned from the mention professions, under Section 44ADA of the act. 

For the purpose of tax calculation, income to be presumed as 50% of the total gross professional receipts during the FY or amount earned by the freelancer higher than the previously mentioned sum claimed. A flat rate of 8% is charged on the gross annual income of the professional.

Following the provisions of Section 44AA, it is compulsory to maintain books of accounts for each individual opting for a prescribed profession. They are also required to maintain books of accounts if the income from business exceeds Rs. 1.20 lakh, excluding the income from prescribed profession. If the business turnover is above Rs. 1 crore, under Section 44AB, tax audit for business income is mandatory

Return Filing

For paying the tax, a tax return must be filed. A freelancer can use ITR 4 for the same. Account books may necessarily only be audited if your earnings exceed Rs. 1 crore, otherwise not required. ITR 4S form is to be filed by freelancers choosing the Presumptive Method of taxation.

If you are a freelancer, Chasing payments must be your biggest pain. Read this blog to know more about chasing clients to recover payments faster.