Income from freelancing has to be reported under the head “Profits and Gains from Business or Profession”.
Due to unmatched flexibility, even traditional jobholders are now seen freelancing on the side in all industries—including sales, education, delivery, IT, and data processing. Pertinently, the supplemental income earned through independent work has to be offered to tax under the Income Tax Act.
Tax on income from freelancing
Income from freelancing has to be reported under the head “Profits and Gains from Business or Profession”. Although the tax rate at which a freelancer’s income is assessed is no different than that applicable to a salaried individual, the “standard deduction” allowed from salary income cannot be claimed on income from freelancing.
Nevertheless, a multitude of expenses actually incurred in a fiscal year in relation to the work undertaken can be claimed as deduction while computing taxable income. For instance, rent paid in respect of a property used for carrying out work, depreciation on eligible capital assets, expenses incurred towards office supplies, monthly telephone bills, internet bills, conveyance expenses, etc., can be claimed as deduction. When incurrence of such expenses is for professional and personal purposes both, only a proportionate amount attributable to professional use can be claimed.
Individuals deriving income from business or profession are required to furnish the return of income in ITR 3. Accordingly, the same form shall be applicable to freelancers earning income from independent work, except when the option of presumptive taxation is chosen.
Taxability on presumptive basis
Generally, all persons engaged in business or profession including consultancy or freelancing are obligated to maintain regular books of accounts and get them audited in order to correctly ascertain taxable income. However, to accord relief to small individual taxpayers from the strenuous task of maintaining books, specified professionals are allowed taxation on presumptive basis wherein taxable income is deemed to be 50% of gross receipts. If the scheme is adopted, no additional deductions in respect of any expenses are allowed as deduction.
Freelancers can opt for the scheme if their gross receipts do not exceed Rs 50 lakh. Adoption of presumptive taxation scheme entails payment of the entire amount of advance tax on or before the 15th of March of the financial year, failing which interest under Section 234C is imposed. The form for furnishing return of income under this scheme is ITR-4.
Opting for concessional tax regime
With effect from financial year 2020-21, individuals can opt for alternate concessional tax rate (CTR) regime wherein income can be offered to tax at lower slab rate provided certain stipulated deductions, exemptions, brought forward losses and unabsorbed depreciation are forgone. It is optional for taxpayers to exercise this option in every assessment year.
However, taxpayers having business or professional income cannot choose between the two tax regimes in every financial year. He will have only one opportunity to do so. Once this option of switching back is exercised, then the individual cannot choose the new tax regime in any of the future financial years. Consequently, a freelancer shall also have only one opportunity to switch-over, post which he will have to continue paying taxes under the chosen regime until freelancing work ceases to be undertaken.
The writer is director, Nangia Andersen LLP. With inputs from Vasudha Arora.