The gig economy is rising in its contribution to GDP across the globe. As the structure of employment shifts to working for yourself rather than working for the company, we still have to ensure that taxes are paid on time and in full.
If you are unsure about what you can claim, deduct and expense before arriving at your tax payable figure, then here are three points to help you out.
1. Ensure that TDS is paid
As a freelancer, you are expected to raise an invoice for the work or service you provide and present this invoice to the entity you have contracted with. When they honour the invoice, ensure that the amount paid to you is net of Tax Deducted at Source (TDS). The IT department ties in all your income and TDS by linking it to your PAN number. You must quarterly check your Form 26AS to ensure that your client has deposited the TDS against your PAN to the Income Tax Department.
This figure assumes relevance when your final income is computed at the end of the year and you have to arrive at the additional tax payable or refund due.
If you estimate that your annual tax payable after adjusting for TDS is going to be more than Rs 10,000, then you also need to pay Advance Tax, equal to that amount. This must be paid before the 15th of March in a given financial year. Failure to do so can lead to penalties.
2. Expenses can be deducted
Did you know that you can deduct expenses from your freelancing income? These expenses need to be directly related to your work. For example, rent, travel expenses, office expenses and so on, can all get deducted from your income before you calculate the tax payable. In today’s context, you can deduct membership paid at a co-working space as well and even your driver’s salary from your income.
Furthermore, you must ensure that the expenses incurred are for the financial year for which you want to claim these expenses as a deduction. Such an expense is neither a capital expense nor a personal expense. The expense is not incurred for a purpose prohibited by any Indian law.
3. Tax saving under Section 80C and Other Deductions
Deductions under the Section 80C remain the same as for a corporate employee. The difference is, there is no employees provident fund amount which can get deducted under this section. However, all other eligible deductions like equity-linked savings schemes, public provident fund contribution, life insurance premium, the amount paid as school fees for your children etc, can all get deducted. You are also allowed to deduct medical insurance premium from your taxable income. Other deductions such as donation to charitable trust, interest on education loan, house rent paid, etc can be availed under other sections.
4. When Personal and Professional Expenses Are Common
Many a Times the cost incurred is common for both personal and professional purposes. For instance you are using your mobile phone connection for both purposes. In such cases a reasonable share of such expenses can be associated with professional purposes and can be thereby claimed as a deduction.
5. Presumptive Taxation
Being a freelancer earning a professional income you can opt for presumptive taxation for your income under Section 44ADA. Under presumptive taxation, tax is applicable on 50% of your gross income for the financial year. However, all the expenses are assumed to be allowed. In a way you pay tax at a flat 50% of income and that’s it. You need not maintain books of accounts and get the books of accounts audited.
Let’s take a look at how presumptive taxation works and why is it beneficial?
You are a freelancer and earned Rs 40 lakhs as fees in the financial year 2020-21. For rendering such professional services you have incurred an expenditure of Rs 10 lakhs during the year. With presumptive taxation you need to pay tax on Rs 20 lakhs (Rs 40 lakhs * 50%). However, you cannot claim the expense of Rs 10 lakhs on this taxable Rs 20 lakhs income.
If you would have not chosen presumptive taxation then you would have paid tax on Rs 30 lakhs i.e. Rs 40 lakhs income minus Rs 10 lakhs expense. With presumptive taxation you will save tax on this additional income of Rs 10 lakhs (Rs 30 lakhs under non-presumptive tax minus Rs 20 lakhs under presumptive taxation)
6. When is Presumptive Tax Not beneficial
Presumptive tax is an advantage for taxpayers who have expenses less than 50% of their gross income. If your expenses exceed your income then it is wise not to choose presumptive taxation.
For instance, for the financial year your gross income is Rs 40 lakhs and total expense is Rs 30 lakhs. Your net taxable income will be Rs 10 lakhs under normal provisions of income tax. Under presumptive taxable you will put 50% of your gross income to tax i.e. Rs Rs 20 lakhs (Rs 40 lakhs * 50%). Hence, tax under normal provisions is more beneficial than presumptive taxation.
7. Choose The Correct ITR
You must select the income tax return correctly. If your turnover exceeds Rs 2 crore then ITR 3 is applicable. If your turnover is less than Rs 2 crore then ITR 4 Sugam is applicable. The ITR 4 Sugam is applicable to taxpayers you are opting for presumptive taxation under section 44ADA. An incorrect selection of ITR form will lead to a default in filing and thereby penalty for non-filing of ITR.
Post the deductions, what’s left is your taxable income.
These are the three basic things you need to be careful about if you are an individual with freelance income. Any other income that you earn, like rental income, will get added to your overall taxable income before calculating tax liability. Income from capital gains remains separate.
Knowing the taxation rules impacting your income is crucial to ensuring overall tax efficiency for your income.