How Freelancers or Part time employees are taxed in India?

• Who is considered as a freelancer?

 A person who is self-employed is considered as a Freelancer. Freelancers provide their services to the clients for some amount of money, they work independently or use professional associations or websites to get work.

• Which fields are dominated by Freelancers?

 The fields that are dominated by freelancers are music, consultancy, journalism, photography, event management, acting, filmmaking, editing, author editing, writing, web designing, graphic designing, computer programming etc.

• How are freelancers and Part-time employees taxed on their income?

Freelancers and Part-Time Employees may receive their fees for providing services to the clients located in India or outside India. Such fees can be received either in a bank or even in cash. Income from freelancing and part-time jobs can be calculated by subtracting Gross Receipts from Eligible Expenses.  This income is taxed under the head ‘Profits & Gains from Business or Profession’.

• Which deductions can be claimed by Freelancers and Part timers?

A freelancer or part-time employee must fulfill the following conditions to claim deduction from his/her gross receipts-

1. The expenses incurred must be wholly & exclusively related to rendering the service.
2. The expenses should not be of the capital nature. However, depreciation expense on capital assets can be claimed as a deduction.
3. The expenses should not be of personal nature.
4. The expenses should not be incurred for any activity that is prohibited by law.

• How are the freelancing expenses treated?

During freelancing, a freelancer spends money on different types of expenses. Expenses which are directly related to freelancing are allowed as a deduction from such freelance income whereas, there are some expenses that are specifically not allowed as per the Income Tax Act, 1961.

A freelancer should fulfill the following conditions to claim the eligible expenses as deduction: -

• The expenses incurred must be wholly & exclusively related to rendering the service.
• The expenses should not be of capital nature. Moreover, depreciation expense on capital assets can be claimed as deduction.
• The expenses should not be of personal nature.
• The expenses should not be for anything, that is against the law.
• A freelancer should maintain all the documents related to the expenses such as invoices/bills, receipts etc. as the document of proof.

• What are the deductions, that can be claimed by a freelancer or a Part-Time Employee?

Following are some of the expenses on which a freelancer can claim deductions: -

Rent- If a freelancer runs his/her business in any rented premises, then the monthly rentals paid by him/her can be claimed for deduction.

Depreciation- If a freelancer purchases any asset like a computer, printer, mobile, furniture etc. for his/ her business then he/she can claim the deduction of depreciation on such capital assets. The rates for depreciation for various assets are mentioned in the Income Tax Act, 1961.

Salaries- If a freelancer hires some individuals for his/her assistance in his/her freelance business, then the salary paid to them is allowed as deduction.

Power & fuel- Electricity, power & fuel expenses spent by a freelancer for carrying out his/her business can be claimed as deduction.

Internet & telephone- Internet and telephone charges paid by a freelancer for running the business can be claimed for deduction.

Other expenses- Any other expenses like cleaning charges, traveling & conveyance, consultancy charges etc, that are spent by a freelancer to run his/her freelancing business can be claimed for deduction.

How can a freelancer divide his/her expenses which are incurred for both professional and personal purpose?

Some of the expenses, made by freelancers are for both professional as well as personal purpose. In such cases, a reasonable portion of expenses which is directly attributable to freelance business can be claimed as a deduction from income.

However, determination of personal portion and professional portion from total expense is totally subjective and it can vary. Therefore, it is always suggested to maintain the proper records for both the purposes and claim deduction on the expenses incurred only for a professional purpose.

Income tax returns are compulsory this year but you’re pressed for time! E-file on the go now.