Indian Freelancers' Tax Guide

Do Indian freelancers have to pay taxes in India?

The answer is yes, you have to pay your taxes if your income falls under the taxable income slab. It doesn’t matter where your income comes from – paypal, skrill, payoneer or direct bank wire - once you receive the money in your bank in India, it is taxable. So now you must be wondering which ITR form should you fill to pay your taxes and how you can avoid paying unnecessarily large amounts of income tax.

Let me try and help.

DO I HAVE TO REGISTER MY WORK AS A BUSINESS?

Since your freelancing can be considered as a business of which you are the sole owner, you are termed as a ‘Sole Proprietor’ under Indian laws and you do not need to register your business or get a TAN (Tax Deduction Account Number). Being a sole proprietor, you shall fall under the self-employed category and all your income will fall under the category “Income from other sources”. Under the present system of rules and regulations, freelancers who provide services such as writing, graphic designing, IT, etc. are not exporters of goods and hence do not need to register themselves for TAN.

HOW MUCH TAX SHOULD I PAY?

There are different tax slabs which have been classified according to income levels.
First of all, every citizen who earns more than Rs. 200000 but less than 500000 has to pay taxes at the rate of 10% of amount by which the total income exceeds Rs. 200000/-. So, if you have earned, say, Rs. 350000, the taxes that you need to pay are calculated as such: 350000 – 200000 = 150000 and ten percent of 150000 is Rs. 15000 – this is the amount you need to pay as your income tax.

Similarly, if you earn more than Rs. 500000 but less than Rs. 1000000, then you shall have to pay Rs. 30,000/- + 20% of the amount by which the total income exceeds Rs. 5,00,000/-. For incomes more than Rs. 1000000 you pay Rs. 130,000/- + 30% of the amount by which the total income exceeds Rs. 1000000/-.

WHICH TAX RETURN FORM SHOULD I FILL?

The tax returns form that you must fill is ITR4 and NOT ITR1 as is commonly believed. Tax returns are required to be filled every year following the year when the income was acquired. For example, if you earn Rs. 230000 from April 1st, 2013 to March 31st, 2014 then you will have to pay Rs. 3000 as taxes before 31st April, 2014 and you will have to file your income tax returns before July 31st, 2014. The year following the year of income is called the assessment year. Thus, in the above case, the assessment year is 2014-15.

HOW IMPORTANT IS ADVANCE TAX?

Now a word of caution – if your tax exceeds Rs. 10000 in a fiscal year then you shall have to pay advance taxes. Failure to pay advance tax may result a penalty of an interest rate of 1% per month on the amount of tax to be paid – that is a very high interest rate.

Advance taxes are taxes which are paid thrice a year at regular intervals instead of the lump amount at the end of the fiscal year. The rules are that if your income tax liability is more than Rs. 10000 in a fiscal year then you shall have to complete paying 30% of the tax by 15 September, 60% by 15 December and 100% by 15th March.

Thus, if you expect (remember that you will have to judge beforehand if the income tax you need to pay will exceed Rs. 10000 at the end of the fiscal year) a taxable income of Rs. 400000 in the year 2014-15, then your total tax liability becomes Rs. 20000. This being more than Rs. 10000, you shall have to pay Rs. 6000 (30%) by September 15, 2014, an additional Rs. 6000 (6000+6000=12000 i.e. 60%) by December 15, 2014 and an additional Rs. 8000 (6000+6000+8000=20000 i.e. 100%) by March 15, 2015.

However, if your taxable income doesn’t exceed Rs. 300000 then you won’t have to worry about advance tax. Note that by taxable income I mean your income after all deductions due to tax saving schemes and the like. So, if you earn Rs. 390000 and then you invest Rs. 100000 in a tax saving fixed deposit under section 80C, then your taxable income is Rs. 290000 and not Rs. 390000. Thus your tax liability becomes Rs. 9000 and hence you need not pay advance tax.

HOW DO I SAVE TAX?

There are many schemes you can take advantage of to save on taxes. The internet is rife with articles on how you can avail of different tax saving schemes like 5 year fixed deposits, life insurance schemes, PPF, ELSS, etc.

Another important aspect that you can take advantage of is that you can deduct the expenses (related to freelancing) that you have incurred from your taxable income. Thus, you can deduct the following expenses:

Rent
Internet charges
Electricity charges
Computer equipment purchases/repairs
Telephone charges
Water charges
Restaurant/Hotel charges for meetings with clients
Salaries or payments to freelancers whom you hire

Of course, you need to have proof of the above expenses in terms of receipts and memos and preserve it in case you are asked for it.

SKRILL USERS’ ADDITIONAL BENEFIT

There’s another tip which Skrill users can take advantage of. Suppose it is February or March and you have already earned Rs. 480000. You are expecting another payment of Rs. 100000 in a couple of days. This will increase your tax liability to the second slab (20%) in the present year and cause you to pay more taxes. In this scenario, you can note that if you wait for another couple of months (till 1st April), you will be able to show this income of Rs. 100000 in the next fiscal year and thus remain in the first tax slab (10%) in the present year.

You can do this if you receive the payment through skrill. Since you can maintain a balance in skrill, you can just hold the balance and withdraw after a couple of months. However, this will rob you of any interest that your bank would have given on the amount had you withdrawn the money to your bank. But, if the rate of dollar to rupee rises, then perhaps you could actually gain from it. It all depends on your judgement and, of course, luck.

Please use the comments section to ask any questions and I shall be happy to respond.

4 comments:

  1. Hi Subhodeep,
    Its very informative article. I have a question.
    1. If I have skrill USD account, does currency comes to bank as USD when I withdraw or does skrill, like paypal, convert it to INR before it transfers the amount?
    2. In your other article I read something like if I receive all my payments in USD then I don't have to pay any taxes. So if I receive $10000 in skrill and withdraw it to my bank, do I have to pay income tax as I will earn somewhere around Rs.600000?
    3. If I have to pay income tax, is any service tax that I paid deductible as expense?
    4. Is INR and $ incomes taxed differently? Can you provide with any links where I can find more information on these things?

    ReplyDelete
    Replies
    1. Hi h54,

      1. Yes the amount is received in the bank in USD but the bank won't allow you to retain a foreign currency (unless you have a foreign currency account) so the bank will convert the money to INR using their own exchange rate (which is much better than the rates paypal offers).

      2. Could you please send me the link to the article where I have written this? Whatever currency you receive the payment in, it will be taxable if your income exceeds INR 2,00,000.

      3. Service tax is applicable if your total turnover reaches INR 10,00,000 in a fiscal year. You will need to register yourself if it does.

      4. Whatever money you receive in a foreign currency is converted to INR by the banks so essentially all your income is in INR at the end of the day. There's no special taxation procedure for an income in a foreign currency.

      Hope I helped!

      Delete
    2. Yes, thanks for your reply.
      It was on the same blog
      http://www.tipsforfreelancers.com/2014/01/paypal-vs-moneybookers-for-indian.html

      I am sorry for the late response. I did check back but didn't see your reply.

      Delete
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