A 9-5 job is not everyone’s calling. Some people value the flexibility and work-life balance more than anything, and a freelancing career provides the perfect balance. From freedom to choose projects of your choice to work at your own pace, the freelancing career has a lot of perks. Freelancing in the digital space has a plethora of opportunities; being able to work from anywhere in the world is the one that entices many people.
However, not having a fixed income source can be challenging at times, especially when you are starting out. Most of the freelancers are unaware of how taxation works for the freelancing industry. Creating GST invoices and computing your overall tax liability can get complicated. Let’s get some insights about some mundane but important aspects of working as a freelancer.
Defining Freelance Income
In general terms, the freelance income can be explained as income generated by working on specific projects that are usually short term where payment is received after successful completion of work. As per the income tax law of India, any income earned by leveraging or displaying your intellectual and manual skills will be considered as income from profession.
This income generated is taxable under “Profit and Gains from Business or Profession”. Here, the gross income will be calculated as an aggregate of all the receipts received by providing professional services. You can rely on your bank statements to calculate your gross income if you have received it through your bank account.
Income Tax Slabs for Freelancers
The income tax slabs define the percentage of tax that is to be paid for different income range. The tax slabs for freelance workers are similar to that of salaried employees working for companies. Let’s peep into the tax slab for the financial year 2020-21.
- Annual income less than or equivalent to Rs. 2.5 lakhs: null
- Annual income between Rs. 2.5 to 5 lakhs: 5%
- Annual income between Rs. 5 to 7.5 lakhs: 10%
- Annual income between Rs. 7.5 to 10 lakhs: 15%
- Annual income between Rs. 10 to 12.5 lakhs: 20%
- Annual income between Rs. 12.5 to 15 lakhs: 25%
- Annual income more than Rs. 15 lakh: 30%
Taxable Income & Expense Deductions Allowed
So, how to compute your taxable income? All the income that you earn as a freelancer will not be taxable as there are considerable expense deductions allowed that reduce your overall tax liability. Freelancers are allowed to deduct any expense they incur while doing their job from their final income.
For example, cab fare paid to visit the client’s office, this is an expense directly related to the job you are doing and you can reduce this expense from your final income to compute your taxable income. Here is a list of conditions to claim deductions from your freelancing revenue.
- The expense should be incurred in the same financial year
- The expenditure should be for the work you are doing
- The amount should have been completely used for your job
- The expenditure should not fall under capital or personal expenditure category
- The amount should not have been spent on any activity prohibited by the law
Some of the common expenses that are claimed as deductions against income include:
- Rent paid for property used for carrying out your job
- The cost of repair for rented property used for work
- Office and travel expenses, this can include the expenditure on telephone bills, internet bills conveyance charges, hospitality expenses, etc.
- Domain registration and apps purchased to test a product can also be included under expenditure incurred
- Expenses common to both professional and personal use can be deducted only to a reasonable extent
Section 20 of the Income Tax Act also allows some other deductions as a relief for taxpayers who save money by investing in tax-savings instruments. A freelancer can reduce his taxable income by Rs. 1.5 lakhs by investing in these financial instruments. Net taxable income is computed by reducing deductions from the gross taxable amount.
Calculating Advance Tax
Advance tax simply means paying a portion of your tax liability before the end of the financial year. “Pay as you earn” is another term for this method. Advance tax is the amount of income tax payable when the tax liability increases the Rs. 10000 benchmark for a financial year. Let’s see how it is calculated.
- Firstly, all receipts are added to determine the total income.
- Subtract relevant expenses that are related to the work
- Add income from other sources, for example, income earned from a house property
- Find out the relevant tax slab and compute your tax amount
GST for Freelancers
The Goods and Services Tax scheme can often be very puzzling. The invoices raised by a freelancer should be GST compliant, the necessary fields include name, address, GSTIN of the service provider and the recipient, date, the value of service provided, SAC, etc. Companies offer GST billing software free download to help users create their invoices without any hassles.
The GST rates applicable for freelancers are in the range of 0 to 28%, contingent on the nature of service provided. If there is no specified rate, then the general rate of 18% is charged. Freelancers are also eligible to obtain the Input Tax Credit on taxes paid by them in the process of rendering services. Let’s pee into the mandatory requirements for GST registration.
- When the annual turnover amount is more than Rs. 10 lakhs (for north-eastern states)
- When the annual turnover amount is more than Rs. 20 lakhs (other states)
- Applicable for service included under Online Information and Database Access and Retrieval services (OIDAR)
Some of the prominent OIDAR services include the following:
- Cloud-based services
- Advertising on the internet
- Online gaming-related services
- Selling software, movies, e-books, etc. using the internet
- Providing information and data to any person using the internet
GST returns can be filled monthly or quarterly depending upon the turnover amount, and the scheme opted for while registering for GST. People with composition schemes and those with a turnover amount of more than Rs. 1.5 crore can file quarterly returns. You can easily obtain all the necessary information related to your GST filing online.