In today’s digital era, many individuals are turning to online platforms to earn a living. From freelancers to bloggers, online trainers to affiliate marketers, the internet has opened a plethora of opportunities. But, with this increasing wave of online income, how does the Indian Income Tax Act treat these earnings? In this blog, we’ll dive deep into understanding the “tax on online income” and the nuances of “income tax for freelancers” in India.
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Understanding Online Income in the Indian Context
The term ‘online income’ is broad. It encompasses a wide range of activities – from selling products on eCommerce platforms, offering freelance services on websites like Upwork or Fiverr, to generating income through YouTube channels, blogs, or affiliate marketing.
From the perspective of the Indian Income Tax Act, regardless of the source, all income that is received or accrues to an individual in India is taxable unless it’s explicitly exempt.
How is Online Income Classified for Taxation?
Profits and Gains from Business or Profession (PGBP)
The Income Tax Act of India outlines a comprehensive structure for the taxation of business and professional income, falling under the head “Profits and Gains from Business or Profession (PGBP).” For individuals earning online, this is a pivotal category to understand.
Nature of Income
Online freelancers, digital marketers, bloggers, e-commerce sellers, app developers, and many others, are often categorized under PGBP. This means the earnings they receive from their digital services or sales are regarded as business income.
Deductions
One of the significant advantages of this category is the allowance of deductions. Expenses directly related to generating online income can be deducted from the gross earnings. This includes advertising costs, website maintenance, domain registration fees, and even software subscriptions.
Books of Accounts
Those falling under PGBP are usually required to maintain books of accounts. It provides a systematic record of all transactions and aids in determining the actual profits and gains.
There can be an exception in case you are eligible for provisions of presumptive income under section 44AD or 44ADA.
Audit Provisions
If the turnover or gross receipts from the online profession exceeds a specific threshold (subject to periodic updates), getting the accounts audited by a chartered accountant becomes mandatory.
Understanding PGBP is fundamental for online earners in India. Proper categorization and adherence to the norms can not only ensure compliance but also optimize tax liabilities.
Income from Other Sources
The Indian Income Tax Act’s “Income from Other Sources” category often encompasses various types of online incomes that don’t neatly fit into other defined categories. Here’s a closer look:
Online Affiliates & Referrals
While many bloggers or influencers earn from affiliate marketing as part of their primary profession (and hence might declare it under PGBP), occasional affiliate earners or those earning through sporadic online referrals might classify this income here.
Digital Gifts & Crowdfunding
Say you’re a content creator who’s received monetary gifts through online platforms or a person who’s raised funds online for a personal project. Such receipts can often fall under this category. However, be aware that gifts from unknown sources or amounts above a specific threshold can be taxable.
Online Contests & Micro-tasks
Earnings from participating in short online contests, surveys, or micro-tasks, which aren’t part of a consistent business model, can be categorized here.
Ad-hoc Online Services
Perhaps you provided a one-off digital consultancy, sold a digital product like an eBook, or offered design services on a whim without having a formalized online business. Such sporadic earnings can be considered under this head.
Interest from E-wallets
As digital transactions become the norm, many hold balances in e-wallets. Some of these wallets offer interest on the maintained balance, and such interest is classified under this category.
Taxation Rate
Income declared under “Income from Other Sources” is taxed at the individual’s slab rates. However, it’s essential to be aware that there’s limited scope for claiming deductions, unlike PGBP.
Capital Gains
If you’re involved in trading stocks or cryptocurrencies online, the gains or losses could be treated as capital gains or losses. The nature (short-term or long-term) would depend on the holding period.
To get more information regarding taxation on capital gains, you can refer to our blog on Decoding taxation on Capital Gains – here
Tax Deductions for Freelancers and Digital Entrepreneurs
One of the advantages for freelancers or those earning online in a business capacity is the ability to deduct expenses. Here are some common deductions:
- Rent of the workspace
- Internet and phone bills
- Cost of software and online tools
- Depreciation on computers and electronic gadgets
- Fees for courses and learning material to enhance skills
- Remember to maintain proper invoices and receipts for all these
- Expenses, as they can come handy during tax audits
TDS and Advance Tax for Online Earners
TDS (Tax Deducted at Source)
At its core, TDS is a mechanism where the person (or organization) making a payment deducts tax at a prescribed rate and remits it to the government. The recipient gets the payment net of the deducted tax.
Payments to Freelancers & Service Providers:
When companies or even larger platforms engage with freelancers or independent online service providers, they may deduct TDS under Section 194J (fees for professional or technical services) before making payment. The deducted amount can be credited against the total tax liability of the recipient at the end of the financial year.
E-Commerce Transactions:
Recent amendments introduced TDS provisions for e-commerce operators. When sellers receive payments for goods or services sold online via e-commerce platforms, the platform might deduct TDS under Section 194-O.
Online Advertisements:
Bloggers or digital platform owners earning from advertisements might face TDS deductions under Section 194C or 194J, depending on the nature of the agreement with the advertiser.
Interest & Other Incomes:
Interest earned from balances in electronic wallets or other online financial platforms might be subject to TDS under Section 194A if it exceeds a certain limit.
Claiming TDS:
Online earners must obtain Form 26AS, a consolidated tax statement, from the Income Tax Department’s website. This form reflects all TDS credited against one’s PAN. It’s essential to ensure that all TDS deducted reflects correctly in Form 26AS, as it can be claimed as a credit when filing the income tax return.
Non-Resident Payments:
If online earners in India receive payments from foreign entities or clients, different TDS provisions and rates may apply, often governed by Double Tax Avoidance Agreements (DTAAs).
Lower or Nil TDS Certificate:
If one believes that their tax liability will be lower than the TDS deductions due to various reasons, they can apply to the Income Tax Department for a certificate of lower or nil deduction of TDS.
Advance Tax
If your tax liability in a financial year exceeds INR 10,000, you might be liable to pay advance tax. This means estimating your yearly income and paying tax in advance in four installments.
You can read our blog on Advance Tax in India – here
GST Implications
With the introduction of GST (Goods & Services Tax) in India, freelancers providing services that cross the exempted turnover limit will have to register for GST. It’s crucial to understand the GST slabs and maintain monthly or quarterly filings as applicable.
A Word of Caution
It’s tempting to consider online income as a ‘side income’ and not report it. However, with increasing data sharing across platforms and stringent regulations, non-disclosure can lead to heavy penalties.
Conclusion
As the landscape of earning opportunities evolves, so do the tax regulations around them. For anyone diving into the digital realm of earnings, understanding the “tax on online income” is crucial. Remember, being proactive in your “income tax for freelancers” planning can save you not just money but potential legal hassles in the future.
Are you an online earner and need expert tax advice? Our team of tax experts is here to guide you. Reach out today!
Note: Tax regulations and rules frequently change. Always consult with a tax professional or refer to the official website of the Income Tax Department of India for the most up-to-date information.
Disclaimer: The information provided in this blog is for general informational purposes only and should not be considered as professional tax advice. Always consult with a professional before making any tax-related decisions.
