Taxation of Freelancers

Who is a freelancer?

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

What are the fields or professions where freelancing is dominant?

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?

Freelancer may receive their fees for providing services to clients located in India or outside India. Such fees may be received in the 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 fulfil the following conditions to claim the eligible expenses as a 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 a capital nature. However, depreciation expense on capital assets is allowed as a 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 invoices, bills, quotations, receipts etc as proof.]

Let us take an example of how the income of freelancers 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 2020-21. 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 the latest configuration for web development in June 2020 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 the financial year 2020-21.

Services by myITreturn for freelancers-

ITR-4 Form is applicable to the freelancers, stating details of Profit and Loss account and Balance Sheet along with Income details. Accordingly, a taxpayer is required to prepare a Profit and Loss account for the year and a Balance Sheet on the last day of the financial year. He is also required to maintain the records for incomes and expenditures which the  Income-tax Officer may ask if required.

However, preparing these financial statements requires expertise and adequate knowledge in taxation. Hence, it is advisable to get your income computation reviewed by the tax experts. A taxpayer may also opt for Assisted filing service provided by myITreturn, wherein the return will be prepared by our tax expert based on chat and telephonic discussions.

Opting for these services will assure you that all the eligible expenses are claimed under the proper head, computation of income is accurate and both Profit & Loss A/c and Balance sheet are correctly prepared.