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Income tax & GST guide for Indian Freelancers

1. What is freelancing?
2. How does freelancer earn?
3. GST on Freelancer
4. Income Tax on Freelancer
5. Accounting for freelancer

What is freelancing?

A freelancer is a person who is self-employed and generally works on a project basis or assignment basis for clients. There is no need for special education or qualification for doing freelancing. Freelancers are available in almost all the fields such as accounting, photography, web programming, office administrator, personal assistant, designing, architect, finance, data searching, BPO, KPO etc. With the growing reach of the internet, online or web freelancing becomes a good avenue for part-time or even full-time earnings.

How does freelancer earn?

Freelancers earn by rendering services to their clients.

GST on Freelancer

1. When you are providing services of up to Rs. 20 lakhs in a financial year
 – In such a case you are not required to register under GST in any case and therefore not liable to collect GST. You are not required to register wherever you are supplying services, whether within your state, in other state or outside India.

2. When you are providing services of more than Rs. 20 lakhs in a financial year – In this case, there can be two conditions as below

(a) All services are provided outside India (Export of Services) – In such a case, registration is not required regardless of the value of services provided. If service of even Rs. 1 is provided in India then registration will be required.

(b) Service is provided outside India as well as in India – Registration is required in such a case. GST is required to be applied on services provided within India. For export services you are not required to apply GST if you have filed Letter of Undertaking (LUT). If you have not filed LUT then you has to apply and collect GST, and thereafter you has to take refund of such GST paid by filing refund forms. LUT is a simple form which doesn’t required much details, so it is advised to file LUT rather than going to the refund route.

You can register voluntarily under GST for claiming back GST paid on input services used for purpose of freelancing.

Income Tax on Freelancer

The income from any profession, that involves work, which requires to use a skill, which is an intellectual skill or is a manual skill is taxable under the head ” Profits and Gains of Business or Profession ” as per the Income Tax Act. The income earned by a freelancer is also taxable under the same head.

First, you are required to find the turnover/gross receipt of your business as per the method of accounting followed (cash or accrual method). The gross income is to be calculated for a financial year i.e from 1st April to 31st March of next year.

Case a – If the gross receipt is more than Rs 50 Lakh – You are required to get your books of accounts audited and have to maintain complete books of accounts.

Case b – If the gross receipt is less than Rs 50 Lakh – In this case, there are 2 ways in which a Freelancer can file his return

Case 1 – When the freelancer is engaged in the profession listed under section 44AA

Option 1 – Presumptive taxation for freelancers (applicable from FY 2016-17) as per Section 44ADA of Income Tax Act,1961
Freelancers can use the Presumptive taxation method and can avoid the burden of bookkeeping. Under the Presumptive taxation method, 50% of your gross receipts shall be considered your income for the purpose of Income Tax.

Option 2 – Maintain proper books of accounts for finding actual profit or loss from freelancing. As your profession is covered under 44ADA, you are required to report at least 50% of gross receipt as your income. However if you want to report lower income (50% of turnover) then you are required to maintain proper books of accounts and get them audited, if the total income (income from freelancing as well as all the other income such as FDR interest, salary etc) of the FY exceed the maximum amount not chargeable to tax (Rs 2,50,000 in FY 16-17).

Case 2 – When the freelancer is engaged in the profession not covered under section 44AA

Proper books of accounts are required to be maintained if the profit from the freelancing exceeds Rs 1,20,000 or turnover exceeds Rs 10,00,000 in any of the previous 3 years. This limit has been increased to 1,50,000 and 25,00,000 respectively from the FY 2017-18.

Note:- No books of account are required to be maintained if the above conditions are not met. Also if you have done few projects as freelancers and the income from such projects are not considerable then you can show such receipts under head Income from Other Sources.

Business Status
A person can do freelancing business as an:-

1. Individual
2. Hindu Undivided Family (HUF)
3. Partnership Firm
4. Limited Liability Firm (LLP)
 – Option for presumptive taxation under section 44ADA is not available.
5. Private or Public Limited Company
 – Option for presumptive taxation under section 44ADA is not available.

Accounting for freelancer

Income/Revenue

The income of a freelancer is the sum of all receipts from works done. Clients may be based in India or outside India and all the payment received from the client should be considered for finding the total revenue of the business/profession. Generally, all the payments are received in bank accounts so bank statement can be used for calculating the total revenue. If there are any cash receipts then it should be added as well for finding the total revenue.

Note:- If any amount is received as reimbursement for out of pocket expense of freelancer then such amount should not be considered as an income.

Expenses

Every business has some expense so do freelancers. Following conditions must be fulfilled for considering any payment as a business expense:-

• The expense must be incurred for the freelancing business.
• The amount must be spent fully and exclusively for the work.
• The expense incurred must be for a lawful purpose and is not prohibited by law.
• The amount expended must not be a capital expenditure or a personal expenditure.

Some of the common expense for freelancers are:-

• Rent expenses
• Telephone expenses
• Internet expenses
• Electricity charges
• Fuel expenses
• Domain purchase expenses, hosting expenses
• Website or Blog designing expenses
• Travel expenses
• Meal or entertainment expenses incurred for the business purpose
• Domain registration/renewal expenses
• Repairs expenses for assets
• Local taxes, insurance etc..
• Office expenses
Depreciation etc..
Note:- In case of expense incurred for both professional and personal purpose, a reasonable amount is only allowed as a deduction which is directly incurred for the work.

Method of Accounting

The books of accounts of a freelancer can be maintained through two types of accounting methods :
a. Accrual basis of accounting
b. Cash basis of accounting

Accrual basis
• Income is booked when the right to receive the same arises.
• Expenses are booked when the obligation to pay arises.

Cash basis
• Income is booked when it is actually received.
• Expenses are booked when they are actually paid.

The accounting method used must be followed consistently by the freelancer. HIRE WRITER OF THIS ARTICLE FOR FILING YOUR INCOME TAX RETURN

About Rohit Pithisaria

Rohit Pithisaria is a Practicing Chartered Accountant from Jaipur and been in practice for more than 7 years. He is actively writing from very beginning of his professional career and is author of various tax articles and blogs.

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