Freelancer’s Outline: Step-by-Step Guide for Filing Your Income Tax Return

Freelancing liberates individuals from the constraints of traditional 9-to-5 jobs, offering the freedom to pursue personal passions, spend quality time with loved ones, or simply break away from the monotony of rigid routines. Whether it’s working from the comfort of home, a quaint café, or a vibrant coworking space, freelancers enjoy the flexibility, allowing you to craft a lifestyle beyond the 9-to-5 grind. Each project offers new horizons, and each client presents meaningful connections. Yet, with this freedom comes the responsibility of managing your own business, including taxes. Whether designing websites, writing content, or consulting, understanding freelance taxes is crucial. Dive into this guide to navigate the complexities of income tax returns for freelancers, to make sure that you can focus on your passion and minimize paperwork. Let’s make tax season a seamless part of your freelancing adventure!

Taxes for Freelancers

Freelancers must pay income tax according to the applicable slab rates and can claim deductions under the category of business and profession. They also have the option to file their income tax return (ITR) under the presumptive taxation scheme provided under Section 44ADA. This scheme allows freelancers to pay tax on only 50% of their gross annual income, provided it does not exceed Rs 50 lakhs(75 lakhs provided 95% of receipts are through online mode).

If a freelancer's gross annual income from Business exceeds Rs 3 crore,(10 crores if total cash receipts are <5%) or for Professional if gross receipts exceeds Rs 50Lakhs (75Lakhs if total cash receipts are <5%), tax audit is mandatory. Freelancers can file their income tax returns using the ITR-4 form under the Presumptive Taxation Scheme. Those not opting for the Presumptive Taxation Scheme should use the ITR-3 form, which is designated for income from businesses and professions.

Exemptions and Deductions

Freelancers can claim deductions on their income under Sections 80C to 80U. The following deductions are available while filing ITR:

Section 80C

Deductions for various investments such as life insurance premiums, Equity-Linked Savings Schemes (ELSS), Sukanya Samriddhi Yojana (SSY), National Savings Certificate (NSC), Senior Citizen Savings Scheme (SCSS), principal repayment of home loans, pension plan contributions, and National Pension System (NPS) payments.

Section 80D

Deduction for medical insurance premiums.

Section 80E

Deduction for interest on education loans.

Section 80EEA

Deduction for interest on home loans for first-time homeowners.

Section 80G

Tax benefits for donations made to social causes.

Section 80GG

Deduction for house rent paid.

Section 80TTA

Deduction for interest earned on savings accounts.

Section 80U

Deduction for individuals with disabilities.

Understand Deductible Expenses

One of the perks of freelancing is the ability to deduct business expenses from your taxable income. These may include home office expenses, equipment purchases, software subscriptions, and even mileage if you use your vehicle for work-related purposes. Understanding which expenses are deductible can significantly reduce your taxable income and, ultimately, your tax liability.

Choose the Correct Tax Form

Freelancers are personally responsible for filing their income tax returns (ITR) and can do so through the Income Tax Portal or through tax e-filing platforms like TaxSpanner. It is crucial to select the appropriate ITR form before filing.

If opting for the Presumptive Taxation Scheme under Section 44ADA, freelancers should use the ITR-4 form. Those not using the Presumptive Taxation Scheme should file their returns using the ITR-3 form, which covers income from business or profession.

Calculating Taxable Income and Tax Due

To effectively minimize your tax obligations as a freelancer, you can leverage deductions available under Chapter VIA of the Income Tax Act. Section 80C, for example, provides opportunities for tax relief on specific expenses, promoting savings for the future by allowing deductions on investments in financial instruments.

Your Total Taxable Income equals Gross Taxable Income minus Deductions. Freelancers can decrease their taxable income by claiming the expenses incurred. Deductions can be claimed to further reduce the taxable income.

Tax Requirements for Freelancers

For freelancers, if your total tax liability within a financial year exceeds Rs. 10,000, you're required to make quarterly tax payments referred to as advance tax.

To Calculate Advance Tax

Requirement

Advance tax is applicable if your estimated tax liability for the financial year (April 1st to March 31st) amounts to ₹10,000 or more after factoring in tax deductions at source (TDS) and tax collection at source (TCS). This obligation applies to individuals, businesses, and professionals earning income from various sources besides salary.

Calculation Steps

Determine your total income

This includes earnings from business/profession, capital gains, interest income, rental income, etc.

Subtract allowable expenses

These could be business-related expenses, professional fees, interest paid on housing loans, etc. (Refer to the Income Tax Act for specific deductions).

Apply the relevant tax slab

Compute tax on your net income according to the chosen tax regime (old or new).

Account for TDS/TCS

Deduct any TDS/TCS already withheld from your income.

Calculate the payable advance tax

Following the breakdown for the financial year (2023-24):

• By June 15th: Remit at least 15% of your estimated tax liability.
• By September 15th: Remit at least 45% of your estimated tax liability (minus the amount paid by June 15th).
• By December 15th: Remit at least 75% of your estimated tax liability (minus previous payments).
• By March 15th: Settle the remaining balance (100% minus prior payments).

Advance Tax Payment

Make online payments through the IT Department’s website.

Steps for Online Advance Tax Payment

1. Go to the Income Tax Department of India's online filing portal.
2. Select the 'Quick Links' section located on the left side of the home page and then select the 'e-Pay Tax' option. You can also use the search bar to search for "e-Pay Tax."
3. Enter your PAN on this screen, then enter it again to confirm. After that, click "Continue" after entering your mobile number.
4. Next, enter the 6-digit OTP that you received on your phone, then select "Continue."
5. Choose the first "Income Tax" box and press "Proceed."
6. Click "Continue" after choosing "Assessment Year" as 2025–26 and "Type of Payment" as "Advance Tax (100)".
7. Fill out all tax details.
8. Press 'Continue' after choosing the bank and payment method.
9. Review the challan information and select "Pay Now." You may also "Edit" these data if that's necessary.
10. An acknowledgment will appear on the following screen once the payment has been completed. On the right side of the challan, you can find the BSR code and the serial number. For future use, keep a copy of this tax receipt. At the time of your next tax return, you need to enter the challan number and BSR code.

Non-payment of Advance tax penalties

Interest charges under Sections 234B and 234C are triggered if you fail to fulfil your advance tax obligations. To avoid these interest penalties

1. Make sure to pay advance tax when your tax liability for the year amounts to Rs. 10,000 or more.
2. By March 31st of the fiscal year, your advance tax payments should cover 100% of your total tax liability.

Section 234B comes into effect when advance tax remains unpaid, while Section 234C applies when interest payments are delayed beyond the specified due dates by the IT Department.

File Your Income Tax Returns

After completing all the necessary forms and calculations, it's time to file your income tax returns for freelancers. Head to the Income Tax E-Filing Portal to kick off your tax filing journey. Download the ITR-4 form from the designated section. Next, fill out the form, guaranteeing all necessary details are accurately provided. This involves computing your gross total income, listing deductions and taxable total income, detailing your business and professional earnings, specifying any TDS, and reporting advance tax and self-assessment tax details.

Reliable Tips to File ITR

Gather Your Income Documents

Before you dive into the tax filing process, it's essential to gather all your income documents. As a freelancer, these may include many forms like Form16, Form 16A, invoices, any other records of income earned throughout the tax year, your PAN and Aadhaar is also necessary. Make sure to keep track of every source of income, no matter how small, to guarantee accurate reporting on your income tax returns for freelancers.

Get Professional Advice

If your financial situation is complex, consider consulting a tax professional or chartered accountant from TaxSpanner for assistance. They can help you maximize deductions and guarantee you compliance with tax regulations.

Avoid Common Mistakes

When filing your ITR, make sure to declare all sources of income, including interest income and rental income. Double-check your bank account details, PAN, and other personal information to prevent processing delays.

In conclusion, filing income tax returns as a freelancer may seem overwhelming at first, but with the right guidance from tax experts like TaxSpanner, it can be a manageable process. By following this step-by-step guide and staying organized throughout the year, you can navigate freelance taxes with confidence. Remember, accurate reporting and timely filing are key to guaranteeing compliance with tax laws and minimizing your tax liability.