Author: Deepa Govind

Deepa Govind is a work from home professional since 2007, and prefers to call herself as a Homepreneur®. She is a Zoologist by education, Blogger by hobby, Freelance Virtual Assistant by chance, and Homepreneur® by transition So you see...Things pan out differently, So be brave and explore. Keep the better ones, best is yet to come
Posted on

Income Tax for Freelancers – Foreword & Introduction

Ebook

Download complete Ebook

PrevIcon

Table of Contents

 NextIcon

Foreword

CA Karan Batra

Albert Einstein once said “The toughest thing in this World is to understand Income Tax”. But he said this in the 20th Century. Had he been living in the 21st Century, he could have never said that because 21st Century is the era of content that is being created by Bloggers from across the globe.

And the same is the case with taxes as well. There is a lot of information present on the internet regarding Income Tax. However, most of them are giving generalised information and not specifically pointing towards Income Tax for Freelancers.

But after reading this book which has been authored by Deepa Govind, I’m sure that no blogger would say what Albert Einstein said. This book has been written in the simplest possible language so as to make it easy for non-finance people to understand taxes. I’m impressed to note the hard work and dedication that has been put in by Deepa to ensure that this book is simple to understand while ensuring that the book is comprehensive in all aspects.

Benjamin Franklin once said “The only thing certain in life is death and taxes”. We can’t do anything about the 1st thing but we surely can do a lot about the 2nd thing i.e. taxes. I hope this book will answer all your tax related queries.

Regards
CA Karan Batra

INTRODUCTION

Freelancing is fondly referred to as “extra income” for reasons galore. Some want their hobby to pay for itself, while for someone else, it is about “test the waters” before taking the big-decision. But, that is beside the point. The point is – Income From Freelancing Is Indeed An INCOME, however small / marginal. And, “Any income derived by way of freelancing job is taxable under the provisions of Income Tax Act. 1961 as “Profits and Gains from Business / Profession”. – Refer this post written way back in 2009, thanks to Ranjit Xavier.
So, how do we actually go about filing our Income Tax? While at office, the designated CA takes care of this.
As a freelancer, not all of us have the affordability of hiring a CA… not to mention the fact that… we freelancers are wary of disclosing our income sources to someone else, unless the person is family, or, a very very very very trusted friend. Eventually, that leaves us to ourselves to do our taxes and do the paper work… doesn’t it? So, roll up your sleeves and let us get started.

Smiley Checklist

Our Check List will be as under

  1. Tax Payee or not ? Where do you fit in?

  2. Know your Income Sources – Calculate TOTAL Income.

  3. Business Related Expenditure – Isolate work related expenditure (Remember to save the bills and receipts)

  4. PROFIT & LOSS – Compute NET Income

  5. Know your Tax Deductions and Exemptions – Calculate Total Deductible Amount.

  6. Calculate TAXABLE INCOME.

  7. Understanding Income Tax Slabs – Compute Tax Amount on your TAXABLE INCOME.

  8. Pay Income Tax – Advance Tax

  9. Due Dates to remember.

  10. Example

  11. Book of Accounts & Auditing.

  12. File your Income Tax Return *

* Not included in this ebook. Hope to have it as a separate ebook.

PrevIcon

Table of Contents

 NextIcon

Posted on

Income Tax for Freelancers – 1. Tax payee or not? Self Evaluation

Ebook

Download complete Ebook

PrevIcon

Table of Contents

 NextIcon

1. Tax payee or not?

Where do you fit in?

We must know where we stand, this makes our tax computation easier.

PS: Do not think that you can get away with hiding your freelance earnings (unless it is made in cash). These days, all transactions are online, and they definitely leave a trail. Trust me, no one wants to be on the bad-books of the tax-man. Sooner or later, IT-Dept is going to catch up. Remember Paypal-RBI issue???
 

Income Tax Rates/Slab for Assessment Year 2013-14 Rates %  
Up to ₹ 2,00,000
Up to ₹ 2,00,000 (for women)
Up to ₹ 2,50,000 (for resident individual of 60 years till 80 years)		 Nil  No, you do not have to pay income tax
₹ 2,00,001 – ₹  5,00,000
Up to ₹ 5,00,000 (for resident individual of 80 years and above, Tax is nil)		 10%
Nil		  Yes, you have to pay tax
₹ 5,00,001 – ₹ 10,00,000 20% Yes, You have to pay tax
₹ 10,00,001 upwards 30%  Yes, you have to pay tax
TaxpayeeORnot Question Bank  from Govt. of India’s Income Tax Department Website.Each section has additional questions. So, take your time to read and understand. 

  • General

  • Taxable Income

  • Tax on Income

  • Return of income

  • PAN

  • Salary Income

  • Income from House property

  • Income from business and Profession

  • Capital Gains

  • Tax Deduction at Source

  • Assessment

PrevIcon

Table of Contents

 NextIcon

Posted on

Income Tax for Freelancers – 2. CALCULATE TOTAL INCOME

Ebook

Download complete Ebook

PrevIcon

Table of Contents

 NextIcon

2. Calculate Total Income

Know your income sources

Freelancers typically tend to handle multiple clients to have a steady stream of income. So, let us chart out a typical freelancer’s likely income source(s) and payment-received structure.
Assuming, One or Many from the following is true ,
You (The Typical Freelancer)

  1. Accept funds in multiple currencies.

  2. Use multiple payment gateways to accept payments (Paypal, Xoom , Stripe, Skrill (previously known as MoneyBookers), Payoneer etc).

  3. Use multiple freelance marketplaces to source for clients, and then get paid into these sites (eg :Elance, oDesk, Twago , Freelancer.com etc).

  4. Payments received into your acct  in (2) and/or (3) are later transferred to YOUR bank account in INR.

  5. Payments are directly made to your bank account by clients electronically, via cheque etc.

  6. You have one or more bank accts into which you pool your freelancing income. Obtain bank statement for the period 1-April-2012 to 31-March-2013, and isolate income transactions.

 

Freelancer’s income will fall under the head
“-income from business and profession-“

TABLE 1 – Income Sources

FROM 1–April-2012 TO 31-March-2013
Income from freelance work, consultations etc.
Referral commission
Interest  from bank Deposits – FD / RD etc
Interest from Post Office Monthly Income Schemes
Insurance commission
Rent (received) from plot / land
 
(Gross Income) TOTAL INCOME  

Not sure about the list of Income Sources ?

SmileyRCJain INCOME TAX / Heads Of Income– A Comprehensive List  , put together by RC Jain & Associates.
Download and read for each section.

PrevIcon

Table of Contents

 NextIcon

Posted on

Income Tax for Freelancers – 3. BUSINESS RELATED EXPENDITURE

Ebook

Download complete Ebook

PrevIcon

Table of Contents

 NextIcon

3.1 Business Related Expenditure

Business Related Expenditure means, any expense incurred by you towards establishing and providing the services you do as a freelance professional (provided, it is exclusively used for professional purpose).
In other words, we are allowed to deduct Business Expenditure (work related expenses) from the TOTAL INCOME, to compute our “PROFIT & GAINS”. It is this balance amount (a.k.a NET INCOME) that is credited to the Bank Account in Indian Rupee.
Some freelancers subcontract their client’s-work, (or), pay other freelancers to do some of their personal-tasks (Graphic work / marketing materials etc). You might wonder where does this expense fit in? Especially,

  • What if the subcontractor / contracting agency is also from India, & get paid in INR.
  • What if the subcontractor / contracting is a foreigner, and the Freelancer(Indian) pays him via Paypal / elance / odesk  in USD / Euro / AUD etc ?

It so seems, we can deduct these expenses as well. But ensure that you have all the documents related to such an expense.

Rishi Trivedi says:

RishiTrivedi_Acumoney

“Entire income you receive is not taxed. It is the profit you make that is taxed. To compute the profit, you are allowed to deduct business expenses against the income. In case of freelancer on the net, some of the expenses could be internet charges, website/domain fee, mobile charges, electricity etc. Basically, all those expenses that you have spent to earn this income is deductible.”

 
 

Note

This query cannot be generalized. You may want to get in touch with a CA with your specific scenario and heed his/her recommendations.

3.2 Depreciation of Assets

Depreciation of Assets :

“Depreciation as per law of lexicon is defined as positive decline in the real value of a tangible asset because of consumption, wear and tear or obsolescence. The concept of depreciation is widely used for the purpose of writing off the cost of an asset against profit over an extended period (its depreciable life), irrespective of the real value of the asset. Depreciation is charged against income or the profit and loss account”

–Source : http://wirc-icai.org/wirc_referencer/
An oversimplified translation of the concept of depreciation is akin to “selling your car”. The value of the vehicle decreases over time / miles covered/ availability of newer models in the market etc.. Computing the depreciation-value is not a DIY issue. To be safe, try to get in touch with a CA.

Alok Patnia puts this in perspective for a freelancer. He says,

AlokPatniaTaxmantra

“In case of assets used partly for business and partly for personal uses, depreciation can be claimed on proportionate value of the asset. For instance depreciation can be claimed by a freelancer on his Laptops, notepads, iPads, mobile phones, computers, modems and other related electronic devices, furniture and electrical equipments, which he uses for his profession, even though the same may be used at home or while travelling or any other place; Similarly, depreciation can also be claimed on owned conveyances, may it be two wheeler or four wheeler.”

—Source : Yourstory.in
Note

Depreciation if handled correctly, can help save a sizable chunk of our earnings. The trick is to do it right. But given calculations involved, it is supremely recommended to connect with a CA and discuss this on a case by case basis.

So, technically we get to deduct our work-related-expenses from our TOTAL INCOME, such as

TABLE 2: work-related-expenses

Do make sure to keep the bills safe, and ready to be produced in the event of an enquiry

Internet Charges
Website / domain charges
Mobile charges
Electricity charges (reasonable proportion)
Depreciation on Computers & peripherals (60% of Book Value)
Expenses on any training , seminars etc you may have attended for the purpose of Freelancing services
Processing / Administrative Fees deducted by the Freelance website (such as 8.75% by ELANCE; 10% by oDesk etc)
Membership fees spent on professional networking, such as LinkedIN etc.
Expenses on Stationary , printer cartridges etc
Payments made to other freelancers / contracting Agencies towards business related tasks *
Total Amount   NET Income = TOTAL INCOME – Total Amount  

So, what remains is the “NET INCOME”
*convert all payments to INR, using the exchange value as on the date of transaction

PrevIcon

Table of Contents

 NextIcon

Posted on

Income Tax for Freelancers – 4. LIST OF DEDUCTIONS & EXEMPTIONS

Ebook

Download complete Ebook

PrevIcon

Table of Contents

 NextIcon

4. Deductions and Exemptions

Certain investments related expenditure are allowed to be deducted from the NET Income, upto a maximum if 1,00,000/- Rs
80C_checklist
Source :Times of India – Guide to Income Tax planning
Also Read : Times of India – Tax Saving Goofups to avoid.
So, this puts forth our next task of listing out the deductions that are applicable to YOU.
Smiley80C

Do pay attention to the options listed, and if need be, double / triple / quadruple check them before putting it down on your computation sheets. After all, it is your hard-earned-money, and you are  eligible to keep every single paisa allowed on you.

 

TABLE 3 – Deductions
Deductions allowed from Gross Income.  
PPF Investments.
NPS Investments.
Insurance Policies Premium payments.
Mutual Fund investments.
NSC investments.
NSS Investments.
SCSS investments.
Post Office/Tax saving Bonds investments.
Children Tution Fees paid.
Tax saving Fixed deposits for 5 yrs.
Pension Fund (80 CCC) investments.
Housing Loan – Principal portion of the EMI is eligible for deduction.
Total deductions allowed in respect to 1 -12
is restricted to a combined total of  ₹ 100000 /- only ..ie Rs 1 Lakh.
Total Amount 1  
Housing loan interest upto ₹ 1,50,000 /- Rs is exempted.
Total Amount 2  
Other Deductions  
Medical treatment of self / dependents upto ₹ 40,000/-
Interest on  loan taken for pursuing higher studies.
Donations to approved charitable institutions.
Physically handicapped – ₹ 50,000 / – to ₹ 1,00,000/- depending on disability.
Total Amount 3  
Total amount deductible from Gross Income Total Amount 1  +
Total Amount 2  +
Total Amount 3

PrevIcon

Table of Contents

 NextIcon

Posted on

Income Tax for Freelancers – 5.TAXABLE INCOME & Calculate INCOME TAX

Ebook

Download complete Ebook

PrevIcon

Table of Contents

 NextIcon

5.1 Calculate TAXABLE INCOME

Taxable Income = NET Income – Total Deductions
This is the actual non-savings part of the NET income upon which one is expected to pay tax to the government.

TABLE 4 –Taxable Income
NET Income from Table 2
Total Deductions from Table 3

(Difference)
Taxable Income  

Next step is to ascertain where your Taxable Income fits in the Income Tax slab table.

5.2 Compute INCOME TAX

Income Tax is calculated on the NET Income.
Use this table ( & a calculator )to compute your Income Tax that need to be paid

General tax payers
Income tax slab (in Rs.) Tax

Approx Tax Amount in Rs
0 to ₹ 2,00,000 No tax   0.00
₹ 2,00,001 to ₹ 5,00,000 10%  ₹ 20,000  – ₹ 50,000
₹ 5,00,001 to ₹ 10,00,000 20%  ₹ 1,00,000 – ₹ 2,00,000
Above ₹ 10,00,000 30%  >₹ 3,00,000

Female Tax Payers
Income tax slab (in Rs.) Tax  
₹ 0 to ₹ 2,00,000 No tax   0.00
₹ 2,00,001 to ₹ 5,00,000 10%  ₹ 20,000 – ₹ 50,000
₹ 5,00,001 to ₹ 10,00,000 20%  ₹ 1,00,000 – ₹ 2,00,000
Above ₹ 10,00,000 30%  >₹ 3,00,000

Senior citizens (Aged 60 years but less than 80 years)
Income tax slab (in Rs.) Tax  
0 to₹  2,50,000 No tax  0.00
₹ 2,50,001 to ₹ 5,00,000 10%  ₹ 25,000 – ₹ 50,000
₹ 5,00,001 to ₹ 10,00,000 20%  ₹ 1,00,000 – ₹ 2,00,000
Above ₹ 10,00,000 30%  >₹ 3,00,000

Very senior citizens (Aged 80 and above)
Income tax slab (in Rs.) Tax  
0 to ₹ 5,00,000 No tax  0.00
₹ 5,00,001 to ₹ 10,00,000 20%  ₹ 1,00,000 – ₹ 2,00,000
Above ₹ 10,00,000 30%  >₹ 3,00,000

PrevIcon

Table of Contents

 NextIcon

Posted on

Income Tax for Freelancers – 6. PAY INCOME TAX (Online)

Ebook

Download complete Ebook

PrevIcon

Table of Contents

 NextIcon

6. Pay Income Tax Online

If the tax-liability (in other words, the amount of tax that need to be paid) is more than ₹ 10,000/-, then the individual is expected to pay this amount in advance before 31-March (of the assessment year) If the tax liability is less than ₹ 10,000/- ,  the assessee is  liable to pay this amount as Self-Assessment Tax before Filing Income Tax Return (on or before 31 July)
Laptop-SmileyOur Income Tax Department has put forth clean and simple how-to on payment of Income Tax, E-Payment Procedure by Income Tax Department, Govt of India.
IncomeTaxSite
From the overview of things, this looks pretty simple and easy to do. But, as with most govt sites, we never know until we try  it out. But then, we can’t really “try out” on Govt. sites.. isn’t it? So, the next best sensible thing to do, was to ask the experts. Taxmantra came forward with the response, and it is most certainly encouraging. Read on !
DGQuestion
So, did you (your associates) use the information in this link to pay taxes online?How was the experience ? Any glitches ?
Do you recommend this to a first time tax payee?
(if no, what other alternatives do you recommend?)
Taxmantra.com Says –

Taxmantra

This system of online payment of Income Taxes is not new and now has established itself as most preferred way of paying taxes online. Infact, there is no other option to remit taxes, if you wish to make payment online. Either, you can directly log on to this page to pay, or if try out from your bank’s online banking, it would take you to this page itself. 

This system has improved a lot and does not have much hitches.

Anyone can make use of this to make payment, the only thing to be noted here is that, there are some taxation terms, which needs to be kept in mind. Like, AY, Nature of payment. We have noticed at times, users make mistake in choosing right terms.

Just so that you are able to get an idea, here is an example calculation

PrevIcon

Table of Contents

 NextIcon

Posted on

Income Tax for Freelancers – 7. DUE DATES for Individuals & Example Calculation

Ebook

Download complete Ebook

PrevIcon

Table of Contents

 NextIcon

7.1 Due Dates for Individuals.

For Individuals (Freelancers) Due Date
First Instalment – Advance Tax t [30%] 15 September
Second Instalment – Advance Tax t [60%] 15 December
Third Instalment – Advance Tax t [100%] 15 March
Income Tax Return [Not-Audited] 31 July *
Income Tax Return [Audited] 30 September
t Delay in payment of Advance Tax attracts interest under 234B and 234C of the I T Act.
* Income Tax Return in case of a Tax-Payer, whose accounts are not required to be audited under any law, can be filed till the end of the assessment year that is 31 March. However,  there may be liability to pay Interest u/s 234A for delay in Filing Return.

7.2 EXAMPLE

TOTAL  Income =

₹ 5,00,000
(Salary / income from freelance services, Fees, Honororia, Interest from Fixed Deposits, Post office savings scheme etc)
Income upto Rs.20,00,00 not taxable

– ₹ 2,00,000
 
 

₹ 3,00,000
Contribution made towards PPF, LIC Premium etc (All put together upto a total of 1 Lakh Rupees, 1,00,00/-

-₹ 1,00,000
Taxable Income
 

₹ 2,00,000
Tax payable at 10 %

 =

₹ 20,000
Education cess (3% of tax payable)

 =

+ ₹ 600
TOTAL TAX PAYABLE  including cess
 

₹ 20,600

Thanks to CodeCogs for this wonderful Equation Editor for webpages.

PrevIcon

Table of Contents

 NextIcon

Posted on

Income Tax for Freelancers – 8. BOOK OF ACCOUNTS & AUDITING

Ebook

Download complete Ebook

PrevIcon

Table of Contents

 NextIcon

8. Book of Accounts & Auditing

when your freelancing business flourishes

Everyone wants to thrive in his/her business, and freelancers are no exception. We continue to be in operation with the vision of “making it big”.  So, it is only fair to equip ourselves with the knowledge of “What to do”…. “When we actually get there”.
I believe that unlike some, most of you (like me) have very limited knowledge of financial jargons. Yet, this is no excuse for not-educating oneself. Let us get started.. now that it involves “money-matters”…

A.      Book of Accounts

Definition: “Books or books of account includes ledgers, day-books, cash books, account-books and other books, whether kept in the written form or as print-outs of data stored in floppy, disc, tape or any other form of electro-magnetic data storage device”. This is an inclusive definition.” – Source : Taxguru

In other words, you need to maintain records of income, expenses, receipts, bills for all transactions exceeding ₹ 50/- Be informed (forewarned) that you are required to preserve these books for at least 6yrs.
Gross Receipts (Definition):

Gross receipts are the total amounts the organization received from all sources during its annual accounting period, without subtracting any costs or expenses.

B.      Auditing (& of course, Auditor)

The book “An Introduction to Indian Government Accounts And Audit” [page 14, para 1.9] issued by the Comptroller and Auditor General of India, defines audit as

  “An Instrument Of Financial Control. It acts as a safeguard on behalf of the proprietor (whether an individual or group of persons) against extravagance, carelessness or fraud on the part of the proprietor’s agents or servants in the realization and utilization of the money or other assets and it ensures on the proprietor’s behalf that the accounts maintained truly represent facts and that the expenditure has been incurred with due regularity and propriety. The agency  employed for this purpose is called an auditor.”

 In simpler terms, auditing means, to check the accuracy of the financial statements (income , expenses, profit&loss) and detect any errors or fraudulent transactions, which should be duly recorded and reported.

Nirmal_CA

Nirmal Says,

Requirement of Maintenance of Accounts

 “ If your Gross Receipts from Freelancing / any Other Business / Professional exceed ₹10 lakhs or income exceeds ₹1,20,000/-  in the Financial Year then you are liable to maintain books of accounts”

Requirement of Audit

“If your Gross Receipts from profession exceed ₹25 lakhs or from Business exceeds ₹1 crore in a financial year, you are liable to get your accounts audited by a Chartered Accountant.”

Ref : Simpletaxindia

“Income from freelancing is then a part of Gross Total Income, just like your Income from Salary, or Income from House Property or Other Sources (Interest incomes, etc). All deduction which are available u/s 80C such as PPF, LIP , etc to name a few, are available from Gross Total Income.
When the income includes ‘Income From Business / Profession’, then applicable Income Tax Return Form is either ITR 4S [Income from Business is assessed a Presumptive Rates] (OR) ITR  4 [For all Business(es) including Audited]”,

See http://canirmalg.wordpress.com/disclaimer/  disclaiming liability on behalf of the author / persons giving inputs and making reviews, etc.

PrevIcon

Table of Contents

 NextIcon

Posted on

Income Tax for Freelancers – IT RETURN & Recommended Reads

Ebook

Download complete Ebook

PrevIcon

Table of Contents

9. FILE INCOME TAX RETURN

tiredSmileyPhew !.. that will be for another post… later.
I am exhausted already…
So until then, ciao !!!
 
 
 

Recommended Read

✔ Go to First post, and Read again !!!
✔ http://wirc-icai.org
✔ http://www.simpletaxindia.net
✔ http://taxmantra.com
✔ http://www.accounting-n-taxation.com
✔ http://www.taxfaq.in/
✔ http://charteredclub.com

Disclaimer, Now that you have read it all
DeepaGovind
I am not an expert at accounts/taxation issues. The information shared with you here is compiled after extensive research and multiple reviews from certified CAs.
The purpose of this article is to enable you to make an “informed-start” on Income Tax computations, and does not claim to be a complete guide in itself.
All the information in this e-book has been obtained via google search.i.e to say, this is publicly available data. I have made an attempt collect and compile only those details which I personally feel that is relevant to fellow freelancer. More so like, one-freelancer-to-another.
I believe you too would agree that there is no “one size fits all” when it comes to taxation issues. There are multiple factors involved. So, it is THE BEST to connect with a CA and discuss things on a case-by-case basis.
Yes, they are highly priced. But, that is the price we ought to pay for their expertise. Let us respect that. One way to go about this would be to group yourself with fellow freelancers and negotiate on the price for bulk processing. But then, it is ultimately the CA’s decision to take your group, AND / OR, your decision to approach a CA on your own

 ~Deepa Govind

PrevIcon

Table of Contents

Privacy Policy - Terms and Conditions