Freelancing — the word rings in the thought of working at your convenience, setting up shop anywhere, and direct exposure to clients. Freelancers get paid based on their contract and may also incur expenses in carrying out the assignment. Keeping track of payments from multiple assignments and hence paying taxes can sound cumbersome, so we got tips ClearTax Founder and CEO Archit Gupta to simplify the process, and tell us how freelancers can easily file taxes.
Keeping track of income
If you are a freelancer, you may receive payments on an assignment basis or every quarter or month, based on your contract. The receipts constitute income from professional services. You will need to aggregate their invoices to find the gross income from freelancing. As a freelancer you can claim deductions for expenses from the gross receipts, thereafter.
Professional receipts above Rs 30,000 per financial year may face TDS deduction. This is deducted at 10% tax at source (from your client) whenever the payment is made to you. The deducted TDS is deposited on behalf of the freelancer by the payer. You can claim this back when you file tax returns. The TDS rate is 7.5% for professional fee transactions from 14 May 2020 until 31 March 2021.
The accrual and cash methods
As a freelancer, you should maintain books of accounts containing a record of your income and expenditure. Or you could get ta professional account to choose between two methods of accounting — accrual method and the cash method. In the accrual method, the income and expense get recorded once they become due. Accrual accounting is irrespective of the actual receipt or payment. However, in the cash method, the accounting is based on actual receipts and payments.
Paying your taxes
From a tax perspective, the method of accounting, once chosen, should be consistent for each year and for the entire freelancing income. It is great to keep a tab on your income from the word go. In the accrual method, your tax liability arises in the year in which you raise the invoice or book the expense. In the cash method, tax liability arises in the year in which you receive the money. Likewise, under the cash method, you can claim a tax deduction for actual payments in the financial year.
A few examples of expenses a freelancer can claim tax credit for:
- Rent for the premises (work area)
- Travelling and conveyance charges
- Costs incurred to carry out repairs to your premises, computer, printer or vehicle
- Depreciation on any assets such as a computer, chairs, desk, printer or vehicle
- Insurance costs, meals and other hospitality costs
- Business promotion costs.
- Any amount incurred to render freelancing services
If a freelancer’s cost is for both personal use and professional use, a deduction is available for the portion attributable to the professional use. An example is the cost of running and maintenance on a vehicle used for personal and professional purposes. You cannot claim a deduction for personal expenses such as self and family’s health care, household groceries, medical insurance and so on.
As a freelancer you can file an income tax return in ITR-3 form which enables reporting of the freelancing income and other incomes. The net income from freelancing gets taxed as income from business or profession. You need to key in the gross receipts and all the expenses and deductions. The freelancer can report income from Indian as well as foreign sources, and can claim credits if TDS has already been deducted.
Investments to save taxes
Tax saving instruments such as mutual funds, PPF, NPS etc and insurance premiums (health and life) can also help you save on taxes as a freelancer. Deductions for a housing loan, tuition fees for kids and preventive health checkups can also help you save on taxes as an individual taxpayer.
A freelancer gets taxed only if the annual income from all sources, freelancing and otherwise is above Rs 2.5 lakh. Other sources of income generally include interest from investments like FD, dividends from stocks and mutual funds, capital gains and rent from house property (exceeding a certain amount each year).
If your gross receipts in a financial year exceed Rs 50 lakh your account books may need to be audited under the tax law. You can still file your return under ITR-3. Also remember that the last date to file income tax returns this year is November 30, 2020 (for the previous period), owing to the pandemic, which is typically July 31.