Freelancers, consultants must use ITR 3 for filing tax returns
In order to comprehend the intricacies of tax filing for freelancers, you need to thoroughly understand the various factors involved to enable to file an error-free tax return.
Who is a freelancer?
You are a freelancer if you are a self-employed individual who earns an income by dint of your intellectual or manual skills. You work independently by selling your services to the clients and use professional tools or web portals to accomplish the assignments contracted to you and are not bound by the rigid rules of regular companies.
What constitutes income for freelancers?
As per the prevalent tax laws in India, any income generated by showcasing your intellectual or manual skills is deemed as professional income and such income is acted upon as “Profits and Gains from Business or Profession”. The components of your gross income in any financial year is the total of all the receipts of fees/ monies in the course of pursuing your profession. Your bank statement acts as the documentary proof of your income if you route all your receipts through the banking channel.
What is the guiding principle taxing income from freelancing?
The tax liability of a freelancer is calculated by “Gross Receipts minus Eligible Expenses”. As already stated, it falls under the head “Profits and Gains from Business or Profession” and is liable to be taxed as per the tax rules and regulations under the Income Tax Act, 1961.
What is the criterion to define eligible expenses?
The following parameters have to be met to establish your claim as legitimate expenses for deduction from gross receipts in the course of freelancing:
Your incurred expenses should fully and exclusively pertain to rendered freelance service.
a).Your expenses of capital nature are excluded.
b).You can claim depreciation on capital assets as an eligible deduction.
c).Your personal expenses are disallowed.
d).Your expenses should be legitimate and not related to anything illegal.
e). As a freelancer, you are required to preserve all the documents related to the expenses such as invoice, bills, quotations, receipts etc. as documentary proof.
What are the expenses that qualify for deduction from income?
The broad categories of admissible expenses that can be claimed as a deduction are:
a). Rent: If you are operating as a freelancer from rented premises, you are allowed to claim your monthly rentals as a legitimate expense for deduction.
b). Repairs and maintenance: Your expenses involving repairs to the rental premises and your freelancing equipment are allowed for deduction.
c). Depreciation: The capital assets like equipment to be used for your profession are eligible for deduction. The applicable rates of depreciation for various equipment are defined in the Income Tax Act.
d). Salaries: The salary paid by you to yours hired hands in pursuance of your freelance profession is eligible for deduction.
e).Power and fuel: Your expenses about electricity and travel for your profession is allowed to be deducted.
f).Office Expenses: Your internet charges, telephone bills, stationery etc., in connection with your freelance profession, is deductible expenses.
g).Other Expenses: Any other charges like municipal taxes, entertainment expenses for client meetings, etc. are permissible deduction amounts.
Combined Personal and professional expenses eligible for deduction:
Partial claims can be made for expenses falling in this category. Examples of this are Cell phone bills.
Expenses explicitly disallowed from deduction claim:
The Income Tax Act has disallowed certain expenses to be claimed as eligible deductible expenses. They are:
a).Income tax paid by you as a freelancer.
b).Cash payment exceeding Rs.20000 made by you to any person in a single day.
c).More than a reasonable amount paid by you to your relative.
e).Any payment made by you where TDS is not applied, 30% of the amount is disallowed.Calculate your Gross Income: The first step is to calculate your gross income comprising all receipts as detailed above for the financial year beginning 1st April to 31st March.
f).Deduct the Eligible Expenses: You have to aggregate all the eligible expenses as detailed above and deduct from your gross income to arrive at your taxable income.
g).Add income from other sources: You have to account for all the income from other sources like interest on savings bank account and fixed deposits, income from trading in shares, equity etc.
h).Income Tax Exemptions: As a freelancer, you are entitled to certain exemptions enjoyed by individuals or any other businessperson as per the Income Tax Act, 1961. The exemptions fall under the following indicative but not exhaustive sections:
Section 80C: Your contribution to PPF, Life Insurance, ULIP, Tax Saving Fixed Deposits etc. The maximum exemption allowed under this section is Rs.150000 in aggregate.
Section 80CCC: Your contribution to annuity/ pension plan.
Section 80CCD: Contribution to NPS limited to Rs.50000
Section 80D: Investment in Medical Insurance.
Section 80DD: Expenditure incurred for medical treatment, nursing, training and rehabilitation of dependent with any disability.
Section 80DDB: Expenses for treatment of specified diseases.
Section 80E: Repayment of Interest on Higher Education Loan.
Section 80EE: Interest on Home Loan.
Section 80G: Deduction for donations to certain funds, charitable institutions.
Section 80U: Permanent disability of self.
Check your credit for TDS:
You should access TRACES for your Form 26AS to ascertain the tax credit received by you.
Payment of advance Tax:
If your tax liability after calculation as detailed in all the above and positioning your taxable income in the proper slab exceeds Rs.10000 annually, then it is incumbent upon you to pay your tax in advance as per defined schedule.
Provision for Tax Audit of Freelance Income:
If your freelance income exceeds Rs.25 lakhs in a financial year, you are required to get your books of accounts audited by a Chartered Accountant under Section 44B.
Conclusion:
Being a freelancer, your professional activities may encompass many subtle variations. This is a very broad guideline to approach your filing of tax returns. A detailed analysis for accuracy in your assessment and using ITR 3 is imperative.
