Income tax slabs for freelancers

Freelancers are in a booming position today. Freelancers can opt for flexible working style and the other party also gains much with respect to cut down on mandatory compliances like Provident Fund (PF), PT (Profession tax) etc. With so many changes happening in freelance fields there were bound to be some changes in existing IT Act. We will see each aspect of freelancing and its tax implications.

What are freelancer’s incomes and how to account for it?

Any freelancer is specialist or subject matter expertise in the field for which he or she render services. So, it is necessary to establish some basis through which the freelancing income can be ascertained. This is why it is important that the freelancer should keep a track for recording the billable hours or if not then the professional receipts.

It is a better and standard practice that the freelancer should maintain basic books of accounts like profit and loss account and balance sheet. Books of accounts are required to be maintained by those freelancers who are not eligible or voluntarily give up presumptive taxation.

Freelancing-Online

The freelancer can either resort cash basis or accrual basis for recognizing and recording the incomes and expenses. Cash basis recording will mean that when any income which is received will be accounted for and every expense which is actually paid for, will be accounted for. However, accrual basis will require that freelancer should recognize the income when it is billed for and expenses to be recognized when they accrue.

Accrual basis is the standard and most accepted accounting approach and since the noncash expenditure like depreciation can only be accounted in accrual accounting approach, it is best to opt for.

Admissible expenditure

Where the freelancer is required to maintain the books of accounts, he or she will be induced to account each money spent. This is because professional income is also accounted and subject to tax only after deduction of admissible expenditure. As per Income Tax law, the following are few examples of admissible expenditure.

  • Depreciation on office equipment

  • Depreciation on equipment used in working even if it is at home (only proportionate depreciation will be allowed)

  • Electricity (proportionate if freelancing is from home)

  • Internet expenditure

  • Domain registration

  • Mobile bills

  • Traveling expenditure (actual expenditure incurred to reach client destination or any other work related travel expenditure only.) etc.

The important point to be noted is that the admissible expenditure is those which are incurred for freelancing business. If the expenditure is common i.e. incurred for both personal as well as professional purposes, then only proportionate expenditure can be claimed against freelancing income.

For e.g. A freelancing accounts professional uses rental premises as his office where he resides also. In such case, he needs to check how much rent can be apportioned for expensing out against freelancing income, based on hours used, time of usage etc.

Admissible expenditure

Taxation of Freelancers

There are two ways in which the professional freelancers will be taxed.

Regular taxation

One is regular income tax framework where the professional income will be calculated on the basis of income and expenditure recognition and recording. Additionally, the freelancer may voluntarily take up to maintain books of accounts, where

  • He incurs loss or

  • Any reason otherwise.

In such case, the net profit derived after deducting expenditure from freelancing income would be taken to Income Tax Computation, where all incomes combined together will be taxed as per following income tax slabs from FY 2017-18 onwards.

Income Tax rate
Upto Rs. 250000 Nil
Rs.250000- Rs.500000 5%
Rs.500000-Rs.1000000 20%
Above Rs.1000000 30%

Regular taxation

Presumptive Taxation

Another way is presumptive taxation wherein the professional income will be taxed under Section 44ADA. The Freelancer will not be required to maintain books of accounts where he opts to apply presumptive taxation under section 44ADA. This scheme can only be opted for by the freelancer if gross receipts from the profession or freelancing are earning Rs.50 lakh or less.

Under This scheme, the freelancer is allowed to declare only 50% of his total gross professional receipts as his income from profession. Rest of 50% will be presumed to be his expenditure in this case. Main feature and benefit is that the freelancer need not maintain books of accounts.

However, since presumptive taxation takes into consideration that 50% of receipts is expenditure, no freelancer will be allowed to claim additional expenditure. Also, presumptive taxation does not recognize loss since it considers part of receipts as income. Hence, if the freelancer is in the loss-making scenario, he can not claim and carry forward such business loss under presumptive taxation scheme. In such case, the only available remedy would be to give up presumptive taxation and adhere to regular taxation. Under these circumstances, he would be required to maintain books of accounts for substantiating loss from freelancing business.

Presumptive Taxation

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