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.
Click here to know about ‘Taxation of freelancers’.
How to apportion an expense which is incurred for both professional and personal purpose?
Some expenses spent by the freelancers are 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:
- Income Tax paid by a freelancer;
- Payment towards any expense made by a freelancer in cash exceeding Rs. 20,000/- on a single day to any person;
- 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.
- 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.
Refer Guide on TDS for detailed information.
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.
Click here to know about ITR forms.
Services by myITreturn for freelancers-
A freelancer is required to file his Income Tax Return in ITR-4, stating details of Profit and Loss account and Balance Sheet along with Income Details. Accordingly taxpayer is required to prepare Profit and Loss account for the year and Balance Sheet as on 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. 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 Profit & Loss A/c and Balance sheet is correctly prepared.
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