Navigating Taxation for Freelancers and Self-Employed Individuals in India

Introduction

Tax may be a small word, but it holds a deep meaning. It is one thing that can make people very worried, especially during the ITR filing time. During this time of the year, everyone tries to gather all their documents and tally their records to ensure nothing is off track. Salaried people have salary slips that can tell them the exact salary breakup with deductions etc. But what about freelancers and self-employed people? 

If you like to know more about freelance taxation, read on.

Who are Freelancers or Self-Employed People?

Anyone who chooses to work with the person or company of their choice without being committed to them full-time is called a freelancer or self-employed person. These people may not get a monthly salary but receive payments based on the projects or assignments they take.  

A freelancer can be a writer, software developer, photographer, blogger, gym trainer, and more. On the other hand, the self-employed can be specified as people working under medical, legal, architecture, accounting, consultancy, and such professionals.

Self-employed or freelancers benefit from deducting their expenses from their income while preparing their ITR tax filing.

What is Included in the Freelancer’s Income?

It may be difficult to track the income earned from a freelancing profession as it is received per project. Your income is not necessarily a monthly income; it could be bi-weekly, weekly, or even fortnightly. If the freelancing amount is credited to your account, you can calculate the total amount and get your total earnings accordingly.  

Remember, your freelancing income will not include rent, interest, dividends, or any other source. They will come under the other income heads.

Methods of Accounting

For self-employed or freelancing professionals, there are two different accounting methods to choose from. Here are the same:

1. Accrual Basis of Accounting

It is the method by which the income is considered when it is actually due. To make you understand, simply if you raise the invoice on 20th March, to be paid on 20th April, it will be considered for March when it was raised. 

In the same manner, expenses also are considered for when they have occurred, even if unpaid. For example, if you received your internet bill on 30th March, but will pay in April, it will be considered for this year’s tax filing.

The tax liability in such a case is for the income that is still not received.

1. Cash Basis of Accounting

In this method, the income received is calculated for the tax liability. If we take the same example we used in the first method, the tax liability will be for the next assessment year since the payment will be received on 10th April. Similarly, the expenses will also be considered for the next financial year, as they will be paid in April.

Moreover, it is vital to remember that you can choose from the above methods, and it is challenging to change frequently.

What is the Tax Payable?

Freelancers need to calculate their taxable income as follows:

Net taxable income = gross taxable income – deductions

If these people are less than 60 years and have a total taxable income of more than Rs. 2.5 lakh they need to pay taxes. If your total tax liability is higher than Rs. 10,000, they are supposed to pay taxes every quarter, known as advance tax. Below are the steps to calculate it:

1. First, add all your payments to calculate your total income.
2. Now, subtract all your expenses.
3. Include income from all other sources.
4. Check the slab which is applicable and calculate the tax amount.
5. If this exceeds Rs. 10000, you must pay the taxes as per the dates below.

The government of India has also given self-employed professionals and freelancers the option to go for presumptive taxation schemes. Under this, they can pay the advance tax in one payment before 31st March of the assessment year. In this way, they won’t have to maintain the accounting books.

Conclusion

As per the Indian tax system, whether you are self-employed, freelancer, or salaried, you must pay income tax. How it is calculated can be different, but the taxes will apply as per the tax slabs. You can contact a CA firm or a consultant to help you file ITR if required.