Should freelancers file Income Tax returns? Here's what the law says

Freelancing is treated as a business and profession, according to the taxation system

The gig economy is booming in India as more people take up freelance projects and contract-based employment. While the flexibility of freelancing is appealing, it raises questions about taxation and compliance. One key issue freelancers face is whether they need to file Income Tax returns (ITR).

Why do freelancers need to File ITR?

Freelancers, like other salaried or business taxpayers, are required to pay Income Tax on their earnings. The Income Tax Act is applicable to all individuals who earn an income, regardless of whether they have local or international clients. Freelancers must file their ITR to avoid penalties and ensure compliance with tax regulations.

To calculate your annual freelancing income, sum up all payments you receive for your professional services. This may include project fees, hourly rates, or other agreed-upon payments. Many freelancers track their earnings by reviewing bank account statements on payments for their work.

How to calculate freelance taxes?

The taxable income of freelancers is calculated by applying the appropriate deductions from the gross taxable income of the freelancer. The taxable income is adjusted with the applicable tax slab to arrive at the accurate tax amount.

Income Tax filing process for freelancers

The steps are as follows:

Visit the official Income Tax Department's E-Filing Portal at incometaxindiaefiling.gov.in.

Fill out the appropriate ITR form:

ITR-4 Form: Use this form if you are opting for the presumptive taxation scheme under Section 44ADA. This scheme allows you to declare a flat percentage of your gross receipts as income.

ITR-3 Form: Use this form if you are not opting for the presumptive scheme. This form requires detailed reporting of your income and expenses.

The forms will require you to fill out various sections, including:

Basic information (like name, PAN, address, etc.)

Gross total income (total income from all sources before deductions)

Deductions (under sections like 80C, 80D, etc.)

Taxable total income (gross total income minus deductions)

Business and profession income details

TDS (Tax Deducted at Source) details

Advance tax and self-assessment tax details

Use Form 26AS:

Form 26AS is a consolidated tax statement that shows the amount of tax credited against your PAN. This includes TDS, TCS (Tax Collected at Source), and advance tax paid.

Check Form 26AS to determine the TDS or TCS credit available and to verify the advance tax paid.

Claim deductions and exclusions:

To save tax, certain deductions and exclusions are available. Some common deductions include those under Section 80C (investments in PPF, NSC, etc.), Section 80D (health insurance premiums), and others.

If not opting for the presumptive scheme, you can claim expenses incurred solely and entirely for freelance work. These can include:

Property rent

Repair charges

Travel expenses

Municipal taxes on business property

Domain registration expenses and other business-related expenses.

Upload the Form: Freelancers can upload the filled form on the Income Tax department's official website.

“Freelancers must pay income tax as per the applicable rates. Freelancers can also claim deductions depending on which tax regime the freelancer opts for,” said Manikandan S, a tax expert at Cleartax. “They can also file tax under the Presumptive Taxation Scheme under Section 44ADA of the Income Tax Act, 1961. When they choose a presumptive taxation scheme, they can pay tax on only half of their gross turnover or receipts. (That is) provided the total income for the year is less than Rs 50 lakh or Rs 75 lakh provided 95 per cent of the gross receipts are received in digital mode. (The increase in limits to 75 lakhs is subject to a condition that the 95 per cent of the receipts must be through online modes).”