India is heading towards being a Gig economy, where temporary, flexible jobs are common place and companies tend towards hiring independent contractors and freelancers instead of full-time employees.
Freelancer is not a company employee on payroll. Freelancing income is earned when hired for specific assignments for a specific term, where payment is received upon completion and submission. Any income that is earned by displaying intellectual or manual skills is treated as income from a profession and is taxable as Profits and Gains from Business or Profession under the Income Tax Law.
Tax is required to be deducted by the payor wherein payment is made to a freelancer exceeding Rs 30,000. Current rate of tax deduction is 10% on gross income. Business entity would also issue Form 16A mentioning complete details of the tax so deducted.
For example: A finance professional is to be paid Rs 1,00,000 by a business entity. In such a case the business entity would pay Rs 10,000 to the tax department and the remaining Rs 90,000 to the professional himself.
Expenses allowed for computation of ‘Profits & Gains from Business or Profession’
Income earned by a freelancer is taxable as Profits & Gains from Business or Profession. Therefore, unlike salaried employees, a freelancer is also eligible to claim tax rebate for expenses so incurred by them in execution of the work.
Legally speaking, such expenses must be related to the work performed by the freelancer and shall not be in the nature of capital expenditure or personal expenditure. While calculating taxable income, various expenses such as rent, repairs, depreciation, office expenses, travel expenses, meal, entertainment, hospitality expenses, local taxes, software expenses, website expenses and insurance can be claimed in as a tax rebate.
Claiming of such expenses is legal and is the right of every professional, which will have a direct impact on immediate lowering of taxes. In some cases, tax reduction may even extend to as high as 30% of the gross expenses so incurred.
Tax Deductions for investments
Deductions up to Rs 150,000 can be claimed for investments made in National Saving Certificates, Public Provident Fund, Fixed Deposit, Post Office Time Deposit Account, Life Insurance, Payment of tuition fees to school, college, University, Investment in Units of UTI or mutual fund.
Tax Deductions for medical insurance
Deduction in respect of medical insurance for payment made towards premium can also be claimed by a freelancer. Maximum deduction allowed under these provisions would be Rs 25,000 (Rs 50,000 in case of a senior citizen). An additional deduction for Preventive Health Check is also available to the tune of Rs 5,000 in aggregate for self, spouse, dependent children, and parents.
Tax Deductions for Education loan
Where the freelancer has taken a loan from a financial institution or an approved charitable institution for the purpose of his higher education or higher education of his relative, then a deduction shall be allowed in respect of the interest paid by such an individual. This deduction is allowed for 8 financial years or until such time the interest is paid in full. There is no upper limit to the deduction allowed under this provision.
Tax Deductions for contributions to charitable organizations
Contributions made to certain specified relief funds and charitable institutions can be claimed as a full deduction from taxable income. Professionals should sit back and think about the social contributions made by them throughout the year, whether it was for Kerala floods, Pulwama attack, Prime Minister Relief Fund or any other social cause. All such contributions to notified organization would help them lower taxes for the year.
Tax Deduction for interest
Interest on deposits (not being Time Deposits) in a savings account with a banking company, cooperative society or post office shall be allowed as tax deduction. It has a general limit of Rs 10,000 for individuals (Rs 50,000 for senior citizens). This is a provision which could be used by every freelancer to lower their taxabe income to the tune fo Rs 10,000.
Deduction for Medical treatment in case of disability
Freelancer who has incurred expenditure for medical treatment (including nursing), training and rehabilitation on account of his own disability or disability of a dependent family member, can claim deduction up to Rs 75,000 for disability and Rs 125,000 in case of severe disability from the gross total income.
Deduction for interest on home loan
The Indian government has always shown a great inclination to encourage citizens to invest in a house. Individuals are eligible for deduction in respect of the interest paid on a home loan up to Rs 2,00,000 during the year. This deduction is eligible for both self-occupied and let-out property. Additional tax benefit of Rs 50,000 can be claimed in case individual has only one house property. Therefore, a total of Rs 250,000 for interest paid on home loan is available as deduction
Presumptive income scheme
Any specified freelancer earning income less than Rs 50 lakh can take advantage of the scheme, whereby he can opt to declare only 50% of their annual income as taxable income. This provision would reduce taxes and compliance burden on a freelancer by a half.
Thus, even a freelancer can avail tax benefits and save taxes while filing the income tax return. What he needs is little knowledge of the tax schemes enshrined in the law.
(By Rajat Mohan, Partner, AMRG & Associates)