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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:

“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.”

 
 

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

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,

“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

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

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