Income Tax rules for a consultant or freelancer are marginally different from the income tax rules for a salaried individual. Salary as a consultant is taxed under the head “Profits and Business or Profession”. Freelancers and Consultants need to fill out and submit either ITR-3 or ITR-4. ITR-3 applies to the income from business or profession. A freelancer can pick possible tax collection and declare half of their gross receipts as their income by filing ITR-4. There are a couple of deductions that are available to the salaried individual which can’t be claimed by someone who is working as a freelancer. In any case, freelancers are allowed to claim their actual expenses done with a connection to work.
As a freelancer or a professional, you can pay tax on the estimated income. This is possible utilizing the Presumptive Taxation Scheme under section 44ADA of the Income Tax Act. Nonetheless, the annual income should be less than Rs.50 lakh.
Suppose a freelancer’s annual pay is Rs.45 lakh, his work-related expenses are Rs.7 lakh. Without Presumptive Taxation, the freelancer can claim a tax deduction on work-related expenses, so the taxable salary would be Rs.38 lakh ( Rs.45 lakh- Rs.7 lakh). Using the Presumptive Taxation, the freelancer’s taxable income will be 50% of the total annual income equal to Rs.22.50 lakh. There is an immense distinction between the taxable pay determined in the two methods, which will bring a huge tax difference as well.
Important Points for Taxation of a Freelancer’s Income
Freelancers can’t guarantee the standard deduction of Rs.50,000 as pertinent to a salaried individual. There is no comparable provision for claiming a standard deduction for a consultant against income received from freelancing.
Consultants or Freelancers can guarantee work-related expenditure brought on an actual basis, however, they are not permitted to guarantee any expenses which are personal in nature. The costs can fundamentally incorporate internet expenses, mobile expenses, printing and stationery, conveyance expenses, etc. to the extent these are related to work and not personal consumption.
Advisors can claim a tiny part of house rent (whenever rented) and electricity costs in regard to the house. Freelancers or consultants can guarantee depreciation on computers and printers used for their work. Balwant Jain explains that in addition to the depreciation, they can also claim expenses incurred on repairs and maintenance of computer and printer.
Deductions under Section 80C, 80CCD, 80D, 80TTA and so on are available to people working as a consultant or a freelancer. “In case you are staying in a rented place you can claim the same under section 80GG up to ₹5,000 per month,” says Balwant Jain. The net income arrived at is taxed at the applicable slab rate. However, some capital gains are taxed at a flat rate.