Unlike salaried professionals, income tax implications can be a grey area for those who are self-employed. Whether you are a freelancer, small business owner or consultant, depending on the source and amount of your income, you may need to comply with various tax-related formalities and implications.
Here are some pointers to help with working out your freelance tax implications:
Maintaining your books of accounts
If your freelance profession falls into any of the following categories—Information Technology, company secretary, film artist, authorised representative, interior decoration, technical consultancy, medical, engineering, architectural, legal, accountancy— and your gross receipts exceed Rs 150,000 in any of the three immediately preceding years or in that particular year, you will need to maintain books of accounts. If your freelance career does not fall into any of the mentioned categories, you’d need to maintain books of accounts only if your income exceeds Rs 250,000 in a particular year or the three immediately preceding years.
You can choose between two methods: cash basis or accrual basis. The main difference between the two is that in cash basis you will need to pay tax only when the income is actually in your hand, whereas in accrual basis, tax liability arises when income is booked. In plain terms, in accrual accounting, revenue is booked when you raise an invoice, while in cash accounting, revenue is accounted when payment is received.
Filing your IT returns
Income tax returns will need to be filed by filling up ITR-4 form. You will need to find out the tax slab you belong to and calculate your tax using the calculator on the ITR website. Keep in mind that you will be taxed on your net income. Make sure that you apply all applicable deductions before you arrive at your taxable income. As an individual, you can claim the Section 80 deductions that are available to your salaried counterparts. As a freelancer, you can also claim the deductions available to business owners. Read more about filing IT returns on Taxes on Freelancer Income.
Paying advance tax on time
If your tax liability is higher than Rs. 10,000, you would need to pay advance tax each quarter on or before 15th June, 15 September, 15th December and 15th March.
Opting for presumptive scheme
As of 2016, freelancers can opt to pay tax under the presumptive scheme. Under this scheme, if you are earning less than Rs. 50 lakhs in a year, you are taxed only on your profits. This is presumed to be 50% of the gross. If your running costs for a business is not too high, opting for this scheme will allow you to save quite a bit of tax. However, you cannot opt out of the scheme for five years.
Goods and Services Tax (GST)
If your turnover exceeds Rs. 20 lakh (or Rs.10 lakh for north eastern states), you will need to seek GST registration. Since GST registration is state-wise, you would need to obtain separate registration for each state. To understand more about this tax, read Simplest guide for GST on freelancers.
TDS and Refund
Under certain conditions, you can save even more by claiming back the TDS that is deducted by clients.Read TDS and Refunds for freelancers to know more.
Once you get the hang of it, freelance and taxes do go hand in hand!