Come April, and everyone starts blaming the Indian education system for not including real-life skills in the curriculum. Not that it’s perfect- but what if we, as adults, now learn a few basics related to our finances and actually start using them instead of playing the blame game? In this article, we will discuss a few basic financial terms and share tax saving tips for freelancers in India.
The most important thing to understand is that freelancing gigs – whether a side business, summer job, or mainstream work – classify as taxable income under Profits and Gains from Business or Profession.
Freelancers and Consultants need to file either ITR-3 or ITR-4, depending on whether they wish to opt for the Presumptive Taxation Scheme (PTS). The Presumptive Taxation Scheme allows businesses with a gross turnover of more than INR 2 crores and professionals with gross receipts of less than INR 50 lacs in a financial year to calculate their tax on an estimated income or profit. Freelancers who wish to opt for the PTS need to file ITR-4 and are not required to maintain books of accounts.
Currently, only a few selected professionals like doctors, lawyers, graphic designers, architects, etc. are qualified to opt for the PTS. You can check the list to see if you are eligible here.
Once you know what type of ITR you need to file as a freelancer, the next step is trying to save tax! We neither mean nor encourage tax fraud – we simply want to share tips to save tax while you use the money in other productive ways.
One important term when it comes to taxes is Deductibles. What does it mean? Expenses made on developing new leads, marketing, and other areas of business including, but not limited to hardware and software purchases, conveyance, accommodation, etc. Naturally, there are certain conditions. You need to ensure that the expense is
- directly related to the freelance work
- incurred during the current financial year
- legal, and not prohibited by law
- Not a capital or personal expense
Here are a few deductible expenses for tax saving:
- Property Rent for your workplace
- Maintenance Expenses including bills for telephone, internet, and conveyance up to a certain amount
- Travel Expenses for client visits and business trips
- Hospitality Expenses such as dining and entertainment expenses meant to gain new business or retain an existing one
- Insurance for your employees and business property
- Repairs for property, furniture, electronic equipment, etc
- Depreciation of gadgets, machinery, equipment, buildings, etc.
- Software Subscriptions directly related to the business
As freelancers, most of us use things like our phone or the WiFi connection for personal and professional work. In cases where it is difficult to determine the nature of an expense like a phone bill, it is acceptable to deduct a reasonable amount from the total as a deductible.
Apart from these deductions, other deductions under Section 80 of the Income Tax Act allow you to deduct a few more expenses. Here are the details-
Section 80C of the Income Tax Act encourages individuals to invest for their future. It allows you to deduct up to INR 1.5 lacs from investments which include payments made towards –
1. Life Insurance Policies for self, spouse, parents, and children.
2. Provident Funds
3. Construction or Purchase of a Residential Property
4. Fixed Deposits with a minimum Tenure of 5 Years
5. Tax Saver Mutual Funds
6. Tuition Fees for a maximum of 2 children
7. Senior Citizen’s Saving Schemes
8. Purchase of NABARD Bonds
Payments made towards National Pension Schemes, Long-Term Infrastructure Bonds, and others are a few more ways you can claim tax deductions under Section 80C.
Section 80D of the Income Tax Act allows deduction of payments made towards health insurance policies, including those made for yourself or on behalf of your spouse, parents and children.
Under Section 80E by the Income Tax Act of India, the government makes sure that you don’t feel burdened by the taxes if you are willing to educate yourself. Under this provision, you can deduct interest repayment on loans taken to pursue higher education. This loan can be availed either by taxpayers themselves or to sponsor the education of their ward/child. Only individuals are eligible for this deduction, with loans from approved charitable organizations and financial institutions permitted for tax benefits.
Section 80G encourages taxpayers to donate to funds and charitable institutions, offering tax benefits on monetary donations. All taxpayers can claim this deduction, subject to them providing proof of payment, with the limits set based on a few factors.
Section 80GG enables individual taxpayers who do not receive house rent allowance a maximum deduction equivalent to 25% of their total income or Rs 2,000 a month – whichever is lower.
If you are a freelancer earning from your own patented product, Section 80RRB is for you! It offers tax incentives to patent holders, providing tax relief to resident individuals who receive an income through a royalty on their patent. You can claim royalty of INR 3 lacs as deductions, given that your patent is registered after 31/3/2003. Individuals who receive a royalty from foreign shores need to bring the said amount to the country within a specific time to be eligible for tax deductions on such a royalty.
And last but not least – GST! As a freelancer, you get to decide whether you need to register your business for GST in addition to saving money on income taxes.
Pro Tip: Plan ahead of time and distribute your investments, donations, insurance premiums and other payments throughout the year, so you do not burden yourself at once!
Additional factors such as other sources of income, eligibility for deductions, the applicability of tax audit, the necessity of bookkeeping for the freelancer, and so on might affect and change your deductions. We encourage you to approach a professional such as a Chartered Accountant or a Financial Advisor to ensure that you are not straying down the wrong path.
Do you know any other ways you can save tax? Do let us know in the comments!