Taxability of Freelance Services By FCS Deepak Pratap Singh


Dear Friends,

You Know that we are still in COVID-19 pandemic effect. We have crossed two COVID-19 waves and waiting for third one. Even after availabilities of vaccines , we are still vulnerable to this COVID-19. During current senecio , offices have been closed and people are working from home for their safety and safety of the their loves one. Many people have started freelancing services based on their attributes and their intellectual skills.

India has emerged to be a hub for passionate freelancers and thereby, the freelance industry has been on a constant growing phase. However, it goes without saying that this particular industry is an unorganised sector and lacks clear and specific rules and regulations. The freelance industry in the country comprises of professional freelancers of various professions, bloggers and consultants. From a wide range of interests starting with travel and food to technology and fashion, freelancing has been a platform for people to display their talents and be their own boss.

You know that any income earned by a person by utilising his/her intellectual skills are taxable under Income Tax Act,1961. The income of  freelancers will be taxed under head “ Income From Business or Profession”.

Freelancing generally means being temporarily hired for undertaking and completing specific assignments. You get paid immediately upon the completion and submission of the assignment.

In such aforesaid cases of freelancing, an individual is not an employee of the company and so is not placed on its payroll. He is not entitled to perks (such as Provident Fund) as mandated by the Companies Act. An individual is not required to go to the office. He can complete the assignment at leisure (as per pre-agreed guidelines) from any place that is convenient to him.

TAXABILITY

Any income that is earned by displaying manual or intellectual skills comes within the purview of income from a profession as per prevalent income tax laws of India. And such income shall be taxable as “Profits and Gains from Business or Profession”. His gross income shall be the sum of all the receipts that he gets while carrying out his profession. To cull out information, the document taken into consideration is a bank account given the condition that an individual has received all his professional income through banking channels.

EXPENSES ALLOWED AS DEDUCTION;

As per the Income Tax Act 1961, freelancers can deduct those expenses that they have incurred to carry on the job, from their income. And this could be anything that is directly related to the job of the freelancer, ranging from the office furniture to expenses on visiting the clients.

PREREQUISITES ;

  1. The expense must have been incurred during the year in which tax is to be paid.

  2. The expense must have been spent fully and exclusively for the purpose of carrying on the freelance income.

  3. The income must not be illegal.

  4. The expense incurred must not be personal or capital expenditure of the freelancer

TAXES PAYABLE FOR A FREELANCER;

If the total tax liability during a particular financial year amounts to Rs 10,000 or more, then the taxpayer is required to pay the taxes every quarter which is called advance tax.

CALCULATING THE ADVANCE TAX;

  1. Add all your total receipts and then determine your total income.

  2. Subtract those expenses that are directly related to your work.

  3. Then add the income from other sources, for instance, house property or a savings account.

  4. Thereafter, find out the tax slab that you belong to and then calculate your tax that is due.

  1. Don’t forget to deduct the TDS

  2. If the tax that is due exceeds Rs.10,000, then you are necessarily required to pay the advance tax by the due dates.

PENALTIES FOR NON-PAYMENT OF ADVANCE TAX;

If the advance tax is not paid by the freelancer, then interest as per sections 234B and 234C are applicable. To avoid paying the interest penalty, follow the below-mentioned guidelines:

  1. Pay advance tax only when your tax liability for a year is Rs 10,000 or more

  2. The advance tax payments that have been made until March 31 of the year should be 100 percent of the individual’s total tax payable.

APPLICABILITY  OF  GST ON FREELANCING SERVICES;

GST has replaced the earlier VAT applicable. The rate of GST will depend on the items you are selling. For example, if you make and sell cakes to bakeries then you must charge 18% GST. Currently, this is the applicable GST rate on cakes. 

Over time, the freelance sector has come out to be one of the highest revenue earning sectors in the industry. Hence, it was bound to be taxed under the law. It is widely known that freelancers are required to obtain GST registration and pay 18 per cent Goods and Services Tax for any income earned from these services. This is implemented to those who earn an income that exceeds the threshold of INR 20 Lakhs. 

A freelancer is required to collect GST from the receivers of their services and pay to the government.  

According to Section 24 of the Central GST Act, an individual who earns an income from outside the country or the state, is liable to get themselves registered with GST and no threshold limit is applicable. To be more precise, the exemption of INR 20 Lakhs is only relevant to small business who earn their revenue from clients and entities present within the state.

Hence, GST registration is mandatory for every freelancer who exports services outside the state or the country and earns revenue from the same, with any exemption limits.

When a freelancer fails to register themselves for GST, they would be liable to pay penalties. The penalty for not registering goes upto INR 25,000, and a penalty of INR 100/50( as mended from time to time) per day  would be applicable for not filing GST returns.

CALCULATION OF TAX LIABILITY FOR A FREELANCER;

 

FIRST STEP- you have to calculate your incomes from all heads such as;

i) Income from house property;

ii) Income from business or profession;

iii) Income from Capital gains;

iv) Income from other sources ( such as interest, dividend , gifts etc.).

SECOND STEP- After addition of all those incomes you will arrive at Gross Total Income as follows;

i) Gross Total Income=Gross Total Receipts(-) Total Expenditure as explained above.

ii) Net Taxable Income=Gross Total Income(-) Deductions available. ( u/s. 80C to 80U).

One can reduce their tax outgo by making full use of deductions under Section 80. In that, Section 80C of the Income Tax Act offers tax relief on certain expenses and encourages taxpayers to save for the future (by giving deductions on investments in financial products). 

You can reduce your taxable income by up to Rs.1,50,000/- u/s. 80C & Rs. 50,000/- u/s. 80CCD(1) and you can also take advantage of payment of Rent up to Rs. 60,000/- p.a. U/s. 80GG by claiming deduction for the amount actually invested/spent under this section.

 If you are aged within 60 years and your net taxable income is more than Rs.2.5 lakh, you are liable to pay tax on your income.

The tax will be paid on the basis of slab specified in which your income falls during previous financial year.


CONCLUSION

A freelancer whether supplying goods or services are liable to be taxed under provisions of Income tax Act,1961 and Goods and  Services tax Act,2017. You have to check your gross receipt during the year and pay taxes accordingly for GST you have to check whether your Gross Receipts exceeds Rs. 20.00 Lakhs or not to get registration under GST but in case of export of goods or services GST Registration is must. In case of income tax your income will be taxable if it-exceed. threshold limit of Rs. 2.50 lash during financial year. You have to add all receipt during the year and deduct allowable expenses to reach you net taxable income and from net taxable income you have to deduct available deductions under Income tax Act. The net taxable income will be taxed on rates applicable in which tax slab it falls.

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