Taxation for Freelancers and consultants

Unlike salaried individuals, freelancers and consultants often find it more complex to understand taxation requirements and file their income tax returns. Freelancers and consultants typically earn income from multiple sources and clients, without the benefit of receiving Form-16 or employer guidelines that simplify filing procedures. The income earned by freelancers and consultants is classified as ‘Income from Business or Profession.’

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Let’s simplify the tax calculation and filing procedures for freelancers and consultants:

Who are Freelancers or Consultants?

Individuals who independently offer professional services to clients or businesses on a contract or project basis, without being committed to long-term employment with a single employer are Freelancers or Consultants.

Freelancers work across various industries as graphic designers, writers, web developers, photographers, etc. Consultants analyse business problems and provide solutions to improve processes in fields like finance, management, HR, IT, marketing, etc.

Tax Filing Requirements

• Choosing the Right ITR Form: Earnings of Freelancers and Consultants are treated as business income under the head “Profits and Gains of Business or Profession” (PGBP). Understanding this classification is essential to determine the appropriate ITR form to file the return.

There are 2 ITR forms that are designed for individuals who earn income from a profession or business. 

• ITR-3: ITR-3 is applicable to those individuals who have income from various sources such as business or profession, capital gains, and income from other sources. Freelancers and consultants can select ITR-3 form if their income is exceeding  ₹50 lakh or who are not opting for presumptive taxation scheme.

• ITR-4: Also known as the ‘Sugam Form, as it offers a simplified tax filing procedure. Individuals whose professional income does not exceed ₹50 lakh can opt for the presumptive taxation scheme under Section 44ADA. Under this scheme, 50% of your total receipts are considered taxable income, and there is no requirement to maintain detailed books of accounts.

• Understanding the Taxable Income: Tax is levied on the total income received for rendering services, after deducting expenses that are directly related to the work.

Taxable Income = Gross Receipts – Allowable Expenses

Common Allowable expenses include:

• Office Expenses: Costs such as rent for office space, co-working fees, electricity, and utility bills.

• Equipment Costs: Expenses for purchasing laptops, computers, or software essential for work.

• Travel Expenses: Costs incurred for business travel, including transportation and accommodation.

• Internet and Phone Bills: Deductible if utilised for work purposes rather than personal use.

• Professional Fees: Payments to accountants, lawyers, or other professionals for their services.

• Advertising and Marketing: Expenses related to promoting your freelancing or consulting services.

• Office Supplies: Costs for office supplies such as stationery, printer ink, and other necessary items.

• Depreciation of Assets: Depreciation on laptops, computers, or other professional equipment is also an allowable expense.

• Claiming Tax Deductions and Verifying Investment information: Review the TDS (Tax Deducted at Source) amount reflected in Form 26AS for taxes deducted by your clients, banks, or other entities. Clients may deduct TDS under Section 194J if their professional fees exceed ₹30,000 in a year.

Additionally, verify your investments in stocks, mutual funds, or fixed deposits using the AIS (Annual Information Statement). Ensure all details of income and investments are accurately reported, and claim the appropriate credit for tax deducted at source from your income.

•  Claiming Tax-Saving Deductions: Freelancers and Consultants can reduce their tax liability by claiming various deductions and under the old tax regime. Common allowable deductions include:

• • Section 80C: Allows deduction of up to ₹1.5 lakhs on investments in various tax saving schemes, such as ULIP, EPF, PPF, ELSS, etc., and expenses such as insurance premiums, repayment of the principal amount on home loans, and tuition fees of up to two children.
  • Section 80D: Allows deduction of up to ₹ 50k on medical expenses incurred for self, spouse, parents, and dependent children.
  • Section 80 TTA: Allows deduction of up to ₹10k on interest income from savings accounts and post office deposits.

• Section 80G: Allows deduction of either 50% or 100% of the donated amount to certain approved charitable institutions, relief funds, and NGOs.

• Section 80E: Allows deduction on the repayment of interest on an education loan.

Note: Under the presumptive scheme (Section 44ADA), freelancers cannot claim additional expenses beyond the 50% deduction but may still use tax saving deductions like 80C, 80D, 80E etc. 

• Filing Income Tax Return: Here is a step-by-step guide to file income tax return online: 

• Log in to the IT Portal: Visit the Income Tax e-filing portal and log in using your PAN, password, and captcha code.

• Go to e-File ITR: Click on ‘e-File’ from the dashboard and select ‘Income Tax Return’.

• Select Assessment Year: Choose the applicable assessment year (e.g., 2025-26) and ITR form (ITR-3/ITR-4 for freelancers/consultants).

• Fill Income Details: Enter income details under ‘Income from Business/Profession’ for freelancing or consultancy income.

• Claim Deductions: Enter details of eligible deductions under respective sections.

• Preview & Validate: Review the form to ensure that reported details are accurate, then click on ‘Validate’ to check for pending errors.

• Submit the ITR: Submit and e-verify your return within 30 days from the date of return filing using Aadhaar OTP, EVC, or Digital Signature.

• Download Acknowledgment: Save the ITR acknowledgment (ITR-V) for future reference.

Conclusion

Understanding taxable income, allowable expenses, eligible deductions, and filing requirements can greatly simplify the tax filing process for freelancers and consultants. Ensure to maintain proper documentation for accurate reporting of income and deductions. It’s advisable to choose the correct ITR form and file your income tax return before the due date to avoid last-minute stress and potential penalties.

Consulting a qualified financial advisor can assist freelancers and consultants in navigating taxation requirements and ensuring timely and accurate filing of income tax returns. To optimise your taxes, download the 1 Finance app and book a consultation with a qualified financial advisor for a seamless, hassle-free tax planning experience.