Freelancers Guide

• Who is a freelancer?

Ans.:- A freelancer is a person who is self-employed. Freelancers sell their services to the clients, work independently or use professional associations or websites to get work.

• What are the fields or professions where freelancing is dominant?

Ans.:- The fields or professions where freelancing is dominant includes music, consultancy, journalism, photography, event management, acting, film making, editing, author editing, writing, web designing, graphic designing, computer programming and so on.

• How is the income from Freelancing taxed?

Ans.:- Freelancer may receive their fees for providing services to the clients located in India or outside India. Such fees may be received in bank or even in cash. Income from freelancing shall be calculated as ‘Gross Receipts minus Eligible Expenses’. This income shall be taxable under the head ‘Profits & Gains from Business or Profession’.

• Which are the eligible expenses allowed as deductions from freelance income?

A freelancer should fulfill  the following conditions to claim the eligible expenses as deduction from his freelance gross receipts-

1. The expenses incurred should be wholly & exclusively related to rendering the service.
2. The expenses should not be of capital nature. However, depreciation expense on capital assets is allowed as deduction.
3. The expenses should not be of personal nature.
4. The expenses should not be incurred for any offence or anything which is prohibited by law.

[Note:- A freelancer should preserve with himself all the documents related to the expenses such as invoice, bills, quotations, receipts etc as a proof.]

Let us take an example how the income of freelancer is taxed-

Eg. Mr. Ankit is a freelance web application developer. He provides his services on contract basis and charges fees to his clients. He  received Rs. 5,60,000/- from his clients during the financial year 2015-16. Further, for rendering this service, he spent Rs. 80,000/- as internet charges, paid Rs. 15,000/- for electricity and telephone bills. He bought a new laptop with latest configuration for web development in June, 2014 for  Rs. 60,000/- on which depreciation at 60% pa. is charged.

How to compute Mr. Ankit’s income from freelance?

• Income from Freelancing is calculated as Gross Receipts minus Eligible Expenses.

Here, Gross Receipts during the year are Rs. 5,60,000/-. However, aggregate of eligible expenses comes to Rs. 1,31,000/- (Internet- Rs. 80,000/- + Electricity & phone bills- Rs. 15,000/- + Depreciation on laptop- Rs. 36,000/-)

Hence, Mr. Ankit’s income from freelance comes to Rs. 4,29,000/- for financial year 2015-16.

What is the treatment of expenses spent during freelancing?

During the course of freelancing, a freelancer spends money on various expenses. Expenses which are directly related to freelancing are allowed as deduction from such freelance income whereas there are some expenses which are specifically not allowed as per the Income Tax Act, 1961.

A freelancer should fulfill the following conditions to claim the eligible expenses as deduction from his freelance gross receipts-

The expenses incurred should be wholly & exclusively related to rendering the service.

The expenses should not be of capital nature. However, depreciation expense on capital assets is allowed as deduction. (E.g. purchase of laptop).

The expenses should not be of personal nature. (E.g. Household expenses)

The expenses should not be spent for any offence or for performing any illegal activity (e.g. bribe, extortion etc.)

[Note: – A freelancer should preserve with himself all the documents related to the expenses such as invoices/bills, receipts etc. as a proof.]

What are the expenses that can be claimed as deduction from the freelance income?

Following are some of the expenses which can be claimed as deduction from the freelance income-

Rent- If a freelancer is running his business in rented premises, the monthly rentals paid by him are allowed as deduction.

Depreciation- If a freelancer purchases any capital asset like computer, printer, mobile, furniture etc. for his business then he can claim the deduction of depreciation on such capital assets. (The rates for depreciation for various assets are given in the Income Tax Act.)

Salaries- A freelancer may hire some persons for his assistance in his freelance business, here the salary paid to them is allowed as deduction.

Power & fuel- Electricity, power & fuel expenses spent by a freelancer for running the business are allowed as deduction.

Internet & telephone- Internet and telephone charges paid by a freelancer for running the business are allowed as deduction.

Other expenses- Any other expenses such as cleaning charges, travelling & conveyance, consultancy charges etc. which are spent by a freelancer to run his freelance business are allowed as deduction.

How to apportion an expense which is incurred for both professional and personal purpose?

Some of the expenses are spent by the freelancers for both professional as well as personal purpose. In such cases a reasonable portion of expenses which is directly attributable to freelance business shall be allowed as deduction from income. However, determination of personal portion and professional portion from total expense is totally subjective and may differ from case to case. Hence, it is always advisable to maintain the proper records for both the purposes and claim the expenses incurred only for professional purpose.

Eg. Miss Anamika, a professional journalist, incurred Rs. 15,000/- as repairs and fuel to her car during the financial year 2014-15. She used her car for both professional & personal purpose.

In the given scenario, if the usage ratio of Miss Anamika is 80% for her professional purpose and rest 20% for personal purpose, then Rs. 12,000/- (80% of Rs. 15,000/-) shall be allowed as deduction from her freelance income.

Expenses which are entirely disallowed as deduction from Gross Receipts-

Income Tax Act has specifically denied deductions of certain expenses. Some of them are as follows:

1. Income Tax paid by a freelancer;
2. Payment towards any expense made by a freelancer in cash exceeding Rs. 20,000/- on a single day to any person;
3. If a freelancer pays any amount which is more than Reasonable Fair Amount to his relatives, then the unreasonable portion is not allowed as deduction.

Eg. Miss Sayana, an independent event manager, paid to her sister Rs. 40,000/-pm. as salary. However, reasonable fair value of salary for such post and qualification is only Rs. 30,000 pm. Hence, the unreasonable portion i.e. Rs. 10,000/- pm shall not be allowed as an expense.

1. If any payment is made by you to any person on which tax is not deducted at source (TDS) though it was required to be deducted, then 30% of amount of payment shall be disallowed.

Eg. Mr. Ram paid Rs. 70,000/- to contractor, for fabrication work, on which he failed to deduct TDS during the financial year. In this case, Rs. 21,000/- (i.e. 30% of Rs. 70,000/-) shall not be allowed as an expense.

Please note that in case of an Individual or HUF, TDS provisions become mandatory in current financial year if Audit provisions were applicable in the preceding financial year. In other cases, same are not applicable.

When audit is applicable to freelancers?

Tax Audit in case of Freelance income-

If the Professional receipts of a freelancer exceed Rs. 25 lakhs during the financial year, he shall be required to get his books of accounts audited by a Chartered Accountant.

Which ITR form will be applicable for freelancers to file their Income-tax return?

Ans.:- Freelancers are required to fill either ITR 4 or ITR 4S for filing their Income-tax return.