ITR Filing for Freelancers: How to File Income Tax Returns for Freelancers?
Updated: Jul 2
Unlike traditional employees, freelancers have to face some issues while filing their income tax returns because of the variable nature of their income and expenses. Understanding how to file income tax returns accurately is critical to freelancers for not only statutory compliance but also in optimizing financial outcomes.
In this detailed article, let's discuss ITR filing especially for freelancers. Whether you are a writer, designer, developer, consultant, or any other type of freelancer, this article will break down what you essentially need to know: from choosing the correct ITR form and going through the kind of deductions you can claim up to actually walking through the e-filing process.
Table of Content
Who are Freelancers?
Freelancers are normally self-employed people who offer their professional services to many different clients without agreeing on a long-term contract with any employer. They are self-employed people who work on different projects or tasks simultaneously for various businesses or individual entities. They work in a model that allows for flexibility and control of workload and schedules, greatly differing from traditional employees in most respects. Under the Indian Income Tax Act, freelancing is considered as a business or profession.
Understanding Tax Obligations for Freelancers
The tax requirements for freelancers in India are governed in relation to provisions laid down for self-employment. Here is how this framework works:
Taxable Income Categories: Income for freelancers should be declared under the "Profits and Gains from Business or Profession". One key difference between freelancers and people with salaries, who receive a Form 16, is freelance professionals need to calculate their net profit by subtracting direct business expenses from the gross receipts.
Presumptive Taxation Scheme: Under Section 44ADA, Presumptive taxation regime has been provided for freelancers whose gross receipts do not cross the threshold of INR 50 Lakhs during a financial year. Such freelancers can declare 50% of total gross receipts as their income and pay taxes on it. It is an absolute and easy way to assess income tax, under which, calculation and payment of taxes need not be supported by detailed maintenance of books of accounts.
Advance Tax: In case of freelancers, advance tax has to be paid when the liability goes beyond INR 10,000 in a financial year. Advance taxes are paid in four installments: 15% by June 15, 45% by September 15, 75% by December 15; and the final payment of 100% on March 15.
Goods and Services Tax: Any freelancer whose turnover is more than INR 20 lakhs (INR 10 lakhs for the North Eastern and Hill States) shall necessarily have to get registered for GST. This will further require him to charge GST on services and file returns, which will include monthly or quarterly sales and purchases.
Deductions: Various expenses directly related to freelance work can be deducted from the gross income. These expenses include but are not limited to, costs of equipment, home office expenses, travel expenses, depreciation, and other business-related expenses.
ITR Filing: Freelancers typically file their returns using ITR 3 or ITR 4 forms, depending on whether they choose to opt for the presumptive taxation scheme. Filing can be done online through the e-filing portal of the Income Tax Department.
ITR Filing for Freelancers: Choosing the Right ITR Form
There are special forms applicable to freelancers while filing the income tax return. Applicable ITR forms for freelancers would therefore be both ITR 3 and ITR 4, depending on the circumstances of each case, especially with respect to whether the presumptive taxation scheme under Section 44ADA applies.
ITR 3
Applicability: ITR 3 is for Individuals and Hindu Undivided Families (HUFs) who have income from a profession and are earning income as a partner in a firm. This comprehensive form is required to be filed by those having income from business or profession including freelancers not opting for the presumptive taxation scheme.
Details Required: Detailed Accounting, including profit and loss account details and balance sheet details to be furnished in ITR 3.
ITR 4
Applicability: ITR 4 is applicable for Individual, HUF, Partnership Firm residents other than LLP who have opted for the presumptive income scheme in Section 44AD, 44ADA or 44AE.
Presumptive Taxation under Section 44ADA: This ensures that any professional having gross receipts up to INR 50 lakhs can declare 50% of his total gross receipts as his income. This scheme makes filing of tax returns very simple by eliminating the requirement of maintaining detailed documentation of expenses and also makes tax computation simple.
Section 44ADA
Benefits: The major advantage of Section 44ADA lies in its simplicity. This can help a freelancer avoid the time-consuming work of maintaining detailed books of accounts and make his taxation simple.
Considerations: While the presumptive scheme under Section 44ADA eases filing, it may not turn out to be beneficial for all freelancers, more so when actual expenses are more than 50% of gross receipt. Such freelancers may find it more tax-efficient to opt out of the scheme and file ITR 3.
ITR Filing for Freelancers: Essential Documents and Information Required
For freelancers, it becomes crucial to maintain a good and organized record for several financial purposes, including smooth processing of tax filing. Listed below are the documents that will be required for maintaining your financial records throughout the year:
Bank Statements: To trace the inflow and outflow of income and expenses through accounts.
Form 26AS: This will show the amount of tax deducted at source and ensure all credits are accounted for.
Expense Receipts: Requisite for claiming deductions, like receipts of stationery, business travel expenses, internet bills, telephone bills, and depreciation on equipment.
Client Invoices: To report the total amount of money received from the respective clients throughout the financial year.
Form 16A/16B/16C: In cases where TDS has been deducted at source other than salary, the forms are utilized to claim tax credit.
Ledgers and Journals: Although this calls for complete maintenance of FY accounts, these books record transactions executed, which are a prerequisite to filing ITR 3 by a person.
Allowable Expenses for Freelancers while Filing the ITR
Proper financial management for a freelancer means not only keeping records of one's income but also knowing what costs can be legally deducted to argue for a significant decrease in one's taxable income. Following is the complete list of deductions for freelancers and some pointers on how to document and claim them.
Home Office Expenses: If you use a part of your home regularly and exclusively for business, the expenses you become entitled to deduct include rent, utilities, real estate taxes, repairs, and maintenance. You will have to calculate the business percentage of your home usage to arrive at the amount that would be deductible.
Depreciation of Equipment: Computers, printers, cameras, or any other types of equipment required for your job can be depreciated over the useful life laid down by the tax laws.
Internet and Photocopier Expenses: You can claim the expenses of internet services and telephone bills incurred for the purpose of doing your work. Only the business-use proportion is allowed as a deduction.
Office Stationery and Materials: All consumable office stationeries, printer ink, paper, photocopy paper, and other directly related office materials used in furtherance of your work are fully allowed as deductions.
Software and Online Services: Directly work-related expenses for software and subscription services.
Travel and Meals: Business trips, airfare, hotels, car rentals, and 50% of meals while on a business trip are deductible.
Marketing and Advertising: All expenses associated with promoting your business, such as costs of advertising material, maintaining a website, and hosting.
Professional Fees: Legal, accounting, and other professional fees directly relating to the activities of your business.
Education and Training: Workshops, classes, and seminars that enhance professional skills or are required to attain certification.
Health Insurance Premiums: Freelancers may deduct payments made for medical, dental, and qualified long-term care insurance premiums on their own account, as well as on that of any spouse or dependent.
How to File ITR Online?
The process of filing your ITR online is quite easy and can be efficiently done if you remember the steps involved. Here follows a step-by-step process to fill and submit your ITR form online:
Step 1: Log in and Prepare for Filing: Log in to the e-filing portal using your User ID as PAN, password, and captcha code. Click on the 'Dashboard' and select the option 'Filing of Income Tax Return'.
Step 2: Select Assessment Year: Select the relevant assessment year for which return is being filed.
Step 3: Choose the Mode of Filing: Here you can choose between prepare and submit online (e-filing) or upload an XML generated from offline software.
Step 4: Fill the ITR Form:
Form Selection: You have to select the correct ITR form. Now, the type of ITR form depends on the source of income. For instance, those working in a salaried job usually file an ITR 1.
Enter Details: Carefully enter all the required information such as details of income, deductions, tax credits, bank account details, etc.
Pre Filled Data: Details of personal info and TDS will be pre-filled with previous records and Form 26AS.
Step 5: Verify the Details and Calculate Tax
Tax Computation: After filling in all the details, click the tab 'Calculate Tax' to find out whether there is any due tax.
Save Draft: One must save the draft frequently to prevent the loss of information.
Step 6: Preview and Submit: Once all sections are filled in, preview your ITR form, check that all the data is correct, and then submit your ITR.
Step 7: e-Verification: After submitting the return, you can e-verify through any of the available options: Aadhaar OTP/EVC generated through net banking. You can even send a signed printout of ITR-V sent to CPC Bengaluru within 30 days of filing.
Advance Tax and GST
Freelancers should comply with advance tax and Goods and Services Tax compliances in order to not end up facing hassle in the form of penalties. An extensive guide on how to deal with the following issues is given below:
Advance Tax: Advance tax stands for the payment made by an individual of his income tax in advance, other than lump sum payment on the last return of the financial year.
Who and Why to Pay?
Advance tax is payable if your aggregate tax liability less TDS exceeds INR 10,000 for the financial year.
Freelancers, being self-employed, have to pay advance tax if they expect a significant tax liability after deducting TDS.
How is Advance Tax Calculated?
Estimate your total income from all sources for the year.
Calculate the tax on this total income at prevailing tax rates.
Find the advance tax to be paid after subtracting TDS and any available tax credits.
GST Implications for Freelancers:
GST is a destination, comprehensive indirect tax levied on the manufacture, sale, and consumption of goods and services across India. In this regard, knowledge of the regulations on GST becomes quite important for freelance professionals who are liable to register under GST.
GST Registration for Freelancers:
Freelancers need to register themselves under GST in case of turnover in a year above INR 20 lakhs (INR 10 lakhs for North-Eastern and hilly states).
In the case of services exported outside India, GST registration is mandatory irrespective of turnover.
Common Mistakes to Avoid While Filing ITR
The process of filing income tax returns is especially tough for freelancers because of their variable income structures and deductible expenses. Here are some common mistakes freelancers should avoid to ensure smooth and accurate ITR filing:
Failure to Maintain Proper Financial Records
Mistake: Freelancers fail to keep detailed records of income and expenses
Consequence: Inaccuracies in reported income and deductions missed.
Solution: Proper and regular accounting practice, either with software or spreadsheets keeping all receipts, invoices, and bank statements in one place.
Mixing Personal and Business Expenses
Mistake: Having one account for handling both business and personal transactions.
Consequence: We all know that in the case of using one account, separating business expenses from personal spending is a headache and may cost the owner-manager some unclaimed deductions.
Solution: Business bank accounts and credit cards to keep records of business transactions easily for accounting and taxes.
Incorrectly Classification of Business Structure
Mistake: Misconception or misrepresentation of the type of business structure: for example, sole proprietorship, partnership, etc.
Consequence: Filing under the wrong business structure creates legal and tax-related problems.
Solution: Define exactly what each business structure is and what their tax requirements are. If you’re still in doubt, consult a tax expert.
Overlooking Deductible Expenses
Mistake: Forgetting to take all possible tax deductions, The place one occupies regularly and consistently for the business one does at home, depreciation of equipment, or professional development.
Consequence: Increased taxable income and, thus increased tax liability.
Solution: Review regularly the list of expenses allowed in relation to freelancing. Make sure all relevant documents are kept regarding the expenses incurred and to claim them.
Failing to Pay Advance Tax
Mistake: Freelancers usually overlook or underestimate the need for advance tax payments.
Consequence: Interest and penalties will keep piling up for payment but not on time.
Solution: Estimate the annual income, calculate advance tax liability, and make a payment on or before the due dates: June 15, September 15, December 15, and March 15.
Ignoring GST Implications
Mistake: Failure to get registered under GST if applicable or non-filing of GST returns.
Consequence: Non-compliance penalties pertaining to GST.
Solution: If turnover in a year exceeds INR 20 lakhs (INR 10 lakhs in special category states), then get registered under GST and know about the requirements for filing.
Ignoring the Importance of ITR Receipts
Mistake: Not keeping or misplacing the ITR receipts and acknowledgments.
Consequence: Challenge in handling discrepancies or audits by tax authorities due to inadequate proof of filing.
Solution: Secure the digital and physical copies of all tax filings and associated receipts for at least 7 years.
Inaccurate Entries in the ITR form
Mistake: Inaccurate entries in the ITR form.
Consequence: Higher chances of receiving notices from the Income Tax Department, followed by possible audits.
Solution: Double-check all entries in the ITR form. A tax expert should be employed to ensure accuracy of entries.
Delaying the Filing Process
Mistake: Filing the ITR at the last minute.
Consequence: Errors due to rushed filing, missing the deadline, and delayed refunds are common consequences of delaying the filing process.
Solution: Early commencement of the tax preparation process will give ample time for the gathering of documents, tax calculations, and normal resolution of issues.
Benefits of Timely and Accurate Filing of ITR
There are several benefits of filing ITR, more particularly for freelancers who do everything with regard to finances independently. The main advantages which freelancers get through timely and accurate filings of the ITR are as follows:
Avoidance of Interest and Penalties: The timely filing helps avoid late filing fees or penalties that could be levied against missed deadlines.
Faster Tax Refund Processing: Accurate and timely filing ensures faster processing of the tax refund one is entitled to.
Avoidance of Legal Consequences: Staying compliant with the income tax laws through proper filing of ITRs minimizes the occurrence of legal implications that could arise due to tax evading or fraudulent activities.
Processing Loans: Most financial institutions demand the latest ITR documents as a proof of income before sanctioning the loan.
Reliable Financial History: Regular and proper tax filing establishes a credible financial track record, which can be valuable to future financial-planning and transactions.
Reduces Chances of Further Audits and Revisions: Accurately reported income and deductions minimize the chances of discrepancies that may attract an audit by tax authorities.
Better Financial Management: The process of collecting financial data and documents for filing ITR results in better organization and understanding of one's finances.
Professional Reputation: A reputation for financial responsibility can be established for clients based on previous year’s accurate filings, especially those requiring the ability to report this information as a prerequisite of awarding contracts to freelancers.
Peace of Mind: Peace of mind from accurate and on-time filing frees off mental space and energy for other critical areas of freelance business.
Optimizing Deductions: Accurate filings help you take all possible deductions and credits entitled to you as a businessperson.
FAQ
Q1. What is ITR filing for freelancers?
ITR filing for freelancers would mean that at close of every financial year they will need to file an income tax return with the Income Tax Department, stating in it their freelance income, relevant expenses against the same, and the resultant taxes payable.
Q2. Which ITR form should freelancers use?
Normally, freelancers use ITR 3 or ITR 4 depending upon whether they avail of the presumptive taxation scheme under Section 44ADA.
Q3. What is presumptive taxation under Section 44ADA?
Presumptive taxation offers a scheme where eligible freelancers may assume 50% of gross receipts as their income, which makes computation of tax and paperwork easy to manage.
Q4. Are freelancers required to pay advance tax?
Yes, advance tax is to be paid by all freelancers whose estimated tax liability comes to more than INR 10,000 in 4 installments during the year.
Q5. How can freelancers claim deductions for business expenses?
Freelancers can deduct business-related expenses directly from their income, provided they maintain receipts and detailed records of these expenses.
Q6. What documents on record should a freelancer retain for tax purposes?
Freelancers shall maintain ledgers recording income, category-wise invoices, expense receipts, copies of bank statements, and other relevant documents about business transactions.
Q7. Can a freelancer carry forward losses?
Yes, freelancers are permitted to carry forward business losses for 8 consecutive years to set off against future profits.
Q8. What is the due date of ITR filing in the case of a freelancer?
The regular deadline is on the 31st of July of the assessment year, and unless extended by the government, it stays that way.
Q9. What if a freelancer does not file their ITR on time?
The penalties for late filing, together with the interest on unpaid taxes, may be imposed, and processing of loans and other financial services may be affected.
Q10. How about the impact of GST on freelancers?
Compulsory registration has to be obtained by every freelance professional whose turnover is more than INR 20 lakhs (or INR 10 lakhs for special category states); the same shall also have to be filed under GST.
Related Posts
See AllThe Aadhaar Card is one of the most crucial identification documents for Indians. You must carry it for all important tasks. You can...
A personal loan is one that people seek out to finance their expenses or other monetary obligations. If you need to pay for unforeseen...
Comentários