Besides a regular job, freelancing can be a good source of additional income. It helps you to maximise savings and ease your journey towards your goals. Freelancing income may include income from vocational activities or services provided by lawyers, doctors, engineers, etc., on a contract or assignment basis, using their qualifications and technical skills. The object of carrying out freelancing is to derive income or to make a profit. Therefore, freelancers’ income is also taxable according to the income tax law.
The income tax law does not specify which activities constitute a profession and which do not. However, as per generally accepted principles, the term ‘profession’ in the Income Tax Act is defined as an occupation involving intellectual or manual skill. Hence, freelancing income will be taxable under the head ‘income from business or profession’. Even if receipts from freelancing are casual and non-recurring, they are taxable as income from the profession.
Taxable freelancing income
The taxpayer should aggregate all his receipts from freelancing and include them in his gross income. The taxpayer can deduct expenses that are directly related to such income. For example, travel expenses, rent paid on the property for carrying out the work, office supplies, internet bills, etc. however, you cannot reduce capital expenditure from the income. You can calculate depreciation on capital assets and take a deduction for the same.
Maintenance of books of accounts
According to the income tax law, the taxpayer shall maintain books of accounts if the income from business or profession exceeds the prescribed limit. However, the taxpayer has the option to opt for a presumptive income scheme.
Presumptive taxation scheme is applicable for those engaged in a business or prescribed profession (engineering, medical, technical consultancy, etc.) with income less than Rs 50 lakh during the financial year. Under the presumptive taxation scheme, the taxpayer is not required to maintain books of accounts. The tax is straightaway payable on the 50 per cent (minimum) of the total professional income earned during the financial year. The taxpayer cannot additionally deduct expenses from such presumptive income.
Which ITR form to use
If the taxpayer opts for a presumptive income scheme, Form ITR-4 should be used to file the income tax return. Otherwise, the taxpayer should file Form ITR-3.
However, if gross receipts are more than Rs 1 crore, i.e. you must maintain accounts and get them audited.
Computation of tax
The taxpayer should calculate net income as per business or profession. Net income shall be total gross receipts after reducing the expenses or deemed income as per the presumptive income scheme. After that, add other income sources such as net income from salary, interest on savings, etc. From the gross total income, claim deductions under Chapter VI-A and arrive at taxable income. Thereafter, calculate tax as per the normal tax slab rates and pay tax (after claiming credit of TDS deducted, advance tax paid during the year).
Hence, to comply with the income tax law, one should include freelancing income under the head ‘income from business or profession’ and file the income tax return.
For any clarifications/feedback on the topic, please contact the writer at namita.shah@cleartax.in
I’m a chartered accountant and a functional CA writer by profession. Reading and travelling in free time enhances my creativity in work. I enjoy exploring my creative side, and so I keep myself engaged in learning new skills.
