Freelancers & Taxes: How You Can Save Time and Money with the Presumptive Tax Scheme

India is the second fastest-growing freelancing market in the world. Over the last two years, freelancing has increased rapidly, mainly because the pandemic created job insecurity across industries. As a result, more people are choosing freelancing, and it is now seen as an important part of the future business ecosystem.

Even though freelancers usually work remotely, their income is still taxable under Indian tax laws. In this article, we will understand what income is considered taxable for freelancers and the tax rules that apply to freelance earnings.

How Do Freelancers Make Money?

Freelancers earn by offering their services to different clients or companies, often working on multiple projects at the same time. Their skills and expertise are used to complete tasks, and they are paid a fee for each service they provide.

All the payments received from these projects together form the freelancer’s total income. According to the Income Tax Act, freelancing is treated like running a business or profession, so this income falls under “Income from Business or Profession” for tax purposes.

Can Freelancers Claim Expenses?

Just like any business or profession, freelancers incur expenses to do their work. However, personal expenses cannot be claimed as deductions under the Income Tax rules.

Here are the key points freelancers in India need to know about claiming expenses:

• You can only claim expenses directly related to your freelance work.
• Expenses for personal use are not allowed. If an expense is partly personal and partly work-related, you can only claim the portion used for work.
• Every expense you claim must have a proper receipt.
• The expense must be incurred in the relevant financial year.

According to Income Tax rules, freelancers can claim expenses like:

• Office supplies such as stationery, phone bills, and internet charges
• Repairs or maintenance of assets used for work
• Rent for a space used for freelance work
• Travel costs for assignments, whether in India or abroad
• Meals and entertainment related to work assignments
• Payments to consultants or advisors
• Depreciation of work-related assets
• Taxes and insurance connected to your work

Example: Deductible Expenses for Freelancers

Maya is a freelance designer working with multiple companies. Her main work-related expenses include:

• Renting a small office
• Phone and internet charges
• Travel by cab to meet clients

She owns two phones (one personal, one for work) and a car. According to Income Tax rules for freelancers, only the work-related expenses are deductible:

• Office rent
• Work phone charges
• Internet bills
• Taxi fares for client meetings

Expenses for her personal phone or car cannot be claimed.

Tax Deductions Available for Freelancers

Freelancers can claim various tax deductions under the Income Tax Act:

• • Section 80C: Up to ₹1,50,000 per year (investments like PPF, ELSS, etc.)

• • Section 80D: Health insurance premiums

• • Section 80E: Education loan interest

• • Section 80G: Donations to charity

Additionally, TDS (Tax Deducted at Source) may be deducted by clients from payments. Freelancers can claim this TDS when filing their income tax return.

Is Advance Tax Applicable to Freelancers?

If a freelancer’s tax liability for the year exceeds ₹10,000, they must pay Advance Tax in quarterly installments.

The total tax is calculated by:

• Adding all freelance income, interest from savings, and property income
• Subtracting allowable freelance expenses and TDS

Failing to pay advance tax on time can lead to penalties under Sections 234B and 234C of the Income Tax Act.

How to Pay Advance Tax

Freelancers can pay advance tax in two ways:

• Online – Through the Income Tax Department’s website.
• Offline – By filling a paper challan and depositing the tax at a bank.

Do Freelancers Need to File Income Tax Returns?

Yes. Freelancers must file income tax returns just like other taxpayers in India. Here’s a simple step-by-step guide:

Step 1 – Calculate Gross Income
Add up all your freelance earnings from April 1 to March 31 of the financial year. (Note: Loans are not counted as income.)

Step 2 – Deduct Expenses
Subtract all legitimate business expenses related to your freelance work.

Step 3 – Choose the Right ITR Form

• • ITR-3: For freelancers reporting income under Business or Profession

• • ITR-4 (Sugam): For freelancers opting for the presumptive taxation scheme

Step 4 – Fill in All Details
Report all income, expenses, deductions, and advance tax paid in your ITR.

Step 5 – Audit and Filing Deadlines

• • If your income exceeds ₹1 crore, your books may require an audit and ITR must be filed by 30th September.

• • Otherwise, the normal ITR deadline is 31st July.

What Are Presumptive Income and Presumptive Tax?

Presumptive Income
Under Section 44AD, businesses with a turnover of up to ₹2 crore can opt for the presumptive taxation scheme. This means the government assumes a certain percentage of your income as taxable:

• • 6% of total turnover if all payments are digital

• • 8% of total turnover if some payments are cash/non-digital

This simplifies tax calculations for small businesses.

Presumptive Tax for Professionals
For freelancers and professionals, Section 44ADA applies. Under this section:

• • If your gross receipts are ₹50 lakh or less, you can opt for presumptive taxation.

• • The government assumes 50% of your gross receipts as profit, which is the amount you will pay tax on.

• • In other words, 50% is treated as expenses, regardless of your actual costs.

How Does Presumptive Tax Work for Freelancers?

Freelancers using Section 44ADA can pay tax on only half of their total income, simplifying the process. The main condition is that your annual income does not exceed ₹50 lakh.

Freelancers opting for this scheme report 50% of their gross income in ITR-4S. However, you should still compare with regular taxation to see which method is more beneficial based on your real expenses.

Example

Amit is a finance freelancer who earned ₹40 lakh in a year.

• • Using presumptive tax, only 50% of ₹40 lakh, i.e., ₹20 lakh, is taxable.

• • Without presumptive tax, Amit could deduct actual expenses of ₹10 lakh, making ₹30 lakh taxable.

Since his tax bracket is 30%, using the presumptive scheme saves Amit ₹3–4 lakh in taxes, making it a simpler and more cost-effective option.

Who Can Opt for Presumptive Taxation?

Certain specified professionals can choose the presumptive taxation scheme under Section 44ADA, provided their gross receipts do not exceed ₹50 lakh in the previous financial year. These professionals include those working in fields such as:

• • Architecture

• • Legal services

• • Medical profession

• • Accountancy

• • Interior decoration

• • Engineering

• • Technical consultancy

• • Company secretary services

• • Information technology

• • Creative artists, and similar professions

What If Your Actual Expenses Are More Than 50% of Your Income?

Let’s again consider the example of Amit. If Amit’s actual business expenses exceed ₹20 lakh, his taxable income would fall below 50% of his gross receipts. In such a case, filing tax under the regular method may result in lower taxable income than presumptive taxation.

However, when you declare profits lower than the prescribed percentage, maintaining proper books of accounts becomes mandatory, and your accounts may be subject to audit as per income tax rules.

Which ITR Should Freelancers File?

Since freelance income is treated as income from business or profession, freelancers can file either of the following returns:

• • ITR-3: For freelancers opting for the regular taxation method

• • ITR-4 (Sugam): For freelancers opting for the presumptive taxation scheme, where 50% of gross receipts is declared as income

In most cases, especially where expenses are not very high, presumptive taxation offers a simpler and hassle-free option.

Final Thoughts

With freelancing becoming a popular career choice in India, it is important for freelancers to understand their tax responsibilities. Knowing the right tax scheme can help save time, effort, and money. For personalised advice or clarity on complex tax matters, it is always wise to consult a chartered accountant or financial advisor.

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