Know your tax and compliance responsibility! And tricks to save taxes as a freelancer!
Freelancing is the wonderful way to become your own boss and work for you passion. As you are a freelancer now, you must understand and plan for your taxes and compliance responsibilities now. If you are a freelancer your income is treated to be income from business or profession.
Tax and compliance being a freelancer:
What is income of a freelancer?
Your total income shall be each and every amount you have received from your client. The source of income could be domestic or international.
What are the expenses related and unrelated to freelancing business?
- Expenses which are incurred in relation to rendering services can be claimed as expense like your office rent, operation cost, travel expense incurred in relation to your business, depreciation on fixed assets which are being used in your business. Basically all expenses which you have incurred in relation to your business will be eligible for tax rebate.
- Personal expenses will not be considered to claim tax rebate
- The expenses on which you claim tax rebate shall be related to that particular financial year.
What is considered to be taxable income of a freelancer?
There are two ways of reporting your taxable income as a freelancer:
Computing income the normal way- Taking into account all your income (domestic as well as foreign), you deduct the expenses which are allowed as per income tax law that is your gross taxable income. In this you can further deduct deduction under other sections such as 80C, 80D, 80 G if any. This is how you arrived at your taxable income.
Computing income using the presumptive taxation scheme-
This taxation reporting scheme is available only to specified professional specified under section 44 ADA of income tax Act whose gross receipt in financial year is upto Rs. 50Lakh.According to this scheme, you can declare your income to be 50% of your gross receipt. You cannot claim expenses for tax rebate if you opt for this. You are also not required to maintain books of accounts if you opt for this scheme. That is less of compliance. Tax savig deductions can be claimed under sections such as 80C, 80D, 80G if ant.
Note: Presumptive scheme can be opted only by specified professionals and they are people engaged in any of the below profession:
- Technical consultancy
- Interior decoration
- Other notified professionals
- Authorized representatives
- Film Artists
- Certain sports related persons
- Company Secretaries and
- Information technology
What is advance tax and is freelancer supposed to pay advance taxes?
Considering all sources of income, If tax liability in a financial year exceeds INR 10,000 you shall be liable to pay advance tax. Advance tax payments have to be made in installments as per the due dates specified the Government.
The due dates are:
Due Date Percentage of tax to be paid
Before 15th September 30% of the total tax payable
Before 15th December 60% of the total tax payable
Before 15th March 100% of the total tax payable
Non payment of advance tax means increased tax liability due to interest on non-payment of advance tax or late payment of advance tax. Don't wait till the day of filing Income Tax Return, pay advance tax on time.
Now How to save taxes on your freelancing income?
For any expenses you incur be in meal in your office or the party you have in office as a staff welfare cause, your travelling bills when you visit clients, you cab bills when you visit client come to office etc, Keep it all safe and documented. As you can claim expenses reducing your taxable income at the financial year end.
- Make sure your cash expense is not higher than 10,000 (an expense), as it will not be eligible for tax rebate. Income tax disallows such expense.
- If your estimated yearly income calculations shows that your tax is going to be higher than 10,000 do not skip payment of advance tax as it will lead to unnecessary interest payment by you.
- Do tax saving investment on time, do not wait till last date, You should do all the investment before the financial year ends. Like for Financial year 2019-20 (period 01.04.2019 to 31.03.2020), you have got to do the saving before march 2020. For this financial year 2018-19 , you cannot do tax saving investments anymore because it should have happened before 31.03.2019
- Search for a consultant a CA around you or in the internet who can give you an idea on your tax liability calculations because the expenses you claim has to be right, your tax calculation has to be accurate. Search multiple times before you find just the right consultants, a CA for your advisor.
Now Let’s see what is relevant of GST side!!
Is GST applicable to a freelancer? Yes. if turnover exceeds the threshold, GST registration is compulsory in that case. However as threshold limit is not applicable in specified cases such as interstate supply that needs to be checked. Freelancers normally being service providers, even if interstate supply is being made, there will be no GST registration applicability till the time threshold limit is not reached. Threshold limit is 20 Lakhs (which has been increased to 40 lakhs for supplier)
Composition scheme is also an easy option which any freelancer can opt, under composition scheme compliances are lower as comparison to regular scheme. Below points needs to be taken care of if any freelancer wants to opt for composition scheme:
1. Available to Supplier of Services (or Mixed Suppliers)
2. Available for those with annual turnover of Rs 50 lakhs
3. Tax rate will be 6% (3% CGST +3 % SGST)
4. No ITC will be allowed.
5. A composition supplier cannot charge GST to customers and has to pay GST from it’s pocket.
6. Cannot provide Inter-state services
7. Taxes are to be paid on quarterly basis and one annual return shall be file
Compliance on filing GST Return for freelancer?
GST return shall be filed irrespective of limit of turnover.
As a freelancer you should always keep a tab of recent changes in tax laws or any updates which may be beneficial for your business to grow. Happy freelancing !!