Income Tax Liability for Freelance Software Developers

People of all and any age can become freelancers. Nowadays, freelancing is flourishing like never before, with a plethora of opportunities and favourable rules of taxation. It has fast become a viable option for people looking for part-time opportunities, or as a source of livelihood.

The term ‘Freelancing’ is often used in reference to consultancies and self-employment. Many consultants and professionals are turning to freelancing. Software developers, bloggers, medical/architectural/legal consultants, tutors, fashion designers, and photographers, among other professionals, are making waves and profits as freelancers.

These freelancers do not work for a stipulated salary; they usually earn on an assignment or on a project basis. The income for such consultants is quite lucrative and offer plentiful savings.

With the growth and evolution of the internet, web freelancing has also evolved and become an attractive avenue to earn money for individuals. The wages of online bloggers depend primarily on the traffic they attract to their content, thereby driving up their revenue via different sources, namely:

  • The affiliate sales
  • Advertisements from the various avenues, including Google AdSense, Direct Ad Sales etc.

So, how would freelancers go about e filing income tax?

Just read ahead to know how freelancers are turning to the internet for Income Tax e-filing and submitting their tax with no hassles.

Knowing your Gross Income:

The income earned by a freelancer is labelled under the income head of ‘Business and Profession’. The primary step to income tax e file is to compute the annual gross income earned by the freelancer. As freelancers are generally paid online, it is an easy and simple task for one to compute his/her gross income.

The gross earnings of a freelancer are computed for a given fiscal year, starting from the 1st of April of a year to the 31st of March of the next year. Any loans taken, for any purpose, are not counted as an income or revenue.

Deduction of the Expenses:

The freelancer must deduct all the expenses made by him/her towards safeguarding the business from his/her gross annual income, in a fiscal year. Thus, only the profits are taxed. The expenses of the business can include telephone bills, internet bills, etc. For example, any freelance software developer can subtract expenses made towards the purchase of a software or an Android app.

Deductions from Depreciation:

A freelancer must deduct all the costs of depreciation from the gross income, or the net annual turnover. Every year equipment, along with electrical items, deteriorate, resulting in the degradation of their values.

For instance, photographers must compute the depreciation accrued towards their cameras, lenses, and the printers. Web freelancers should factor-in the depreciation incurred on their computers, laptops, other gadgets and devices used by them.

If you have rented a place to work, then you can even claim for tax exemption on the rent. The fee, freelancers pay towards holding or gaining membership of any professional association, or business subscriptions  are subject to exemption from income tax.

Therefore, all sorts of expenditures that a freelancer makes towards his business, are exempted from taxation. These expenditures must be legal, and must not be made towards personal ends.

The Inclusion of Income from all other sources:

Except for the earnings from freelancing, a freelancer must also incorporate other revenue in their Income Tax Returns (ITR). A few examples are mentioned below:

  • Earnings from a property as a rental return, or a sales gain.
  • Income accumulated on their Fixed Deposits, or savings account, in the form of interest
  • Earnings from trading debentures, shares, equity, etc.
  • Any earning generated by the employer, in the additional hours during the year.
  • All types of other earnings
  • Any other earning not mentioned here

Deductions or Exemptions:

While filing the income tax returns, freelancers can also claim several tax exemptions/deductions, just like other business persons and salaried individuals.

Section and its Part Tax Exemption/Deduction Offered
Section 80 C If the freelancer has bought a life insurance policy or is making payments towards superannuation, provident fund, fixed deposits, purchase/construction of any housing property, tuition fees etc.
Section 80 CCC If a freelancer invests towards pension plans then s/he can claim a maximum exemption of up to a limit of Rs. 1. 5 lakh.
Section 80 CCD If a freelancer invests in the Central Government Pension Scheme (contributions by both the employer as well as the taxpayer) then s/he can claim an exemption of tax, but only if the investment does not exceed 10% of the salary of the person.
Section 80 CCF If the freelancer invests in long-term infrastructure bonds that are notified by the Indian Government, s/he can claim a maximum exemption of up to Rs. 20,000.
Section 80 CCG An investment made in the Equity Saving Schemes run by the government (to particular Indian residents and citizens) is exempted up to a limit of Rs. 25,000.
Section 80 D Expenses made by the freelancer towards premium payment of health insurance plans are exempted. S/he can also purchase the plan for child or spouse, and claim the exemption.
Section 80 DD A freelancer can claim an exemption of up to a limit of Rs. 1.25 lakh towards the treatment of severe or normal disabilities.
Section 80 DDB Expenses incurred for the treatment of some specified diseases are also exempted
Section 80 E If the freelancer has taken an education loan, then s/he can claim an exemption.
Section 80 EE The payments made against any loan for buying any property for residential purposes are exempted from taxation.
Section 80 G If the freelancer is contributing towards charitable funds, including the National Defence Fund, the Prime Minister Relief Fund, then s/he can claim an exemption of up to 100%.

Income Tax Slabs:

The same tax slabs that apply to salaried individuals are applicable to freelancers also.

Income Tax
Up to Rs. 2.5 Lakh No tax
Rs. 2.5 Lakh to Rs. 5 Lakh 10%
Rs. 5 Lakh to Rs. 10 Lakh 20%
Rs. 10 Lakh and above 30%

Forms used while e Filing ITR:

The Form ITR 4 must be used when the freelancer files his/her tax returns. If his or her income is more than Rs. 1 crore, his/her account books must be audited according to the Income Tax Return (ITR) laws (Section 44AB). In such a case, the ITR has to be filed before September 31st.

When a freelancer’s turnover is less than Rs. 1 crore, there is no need for any audit, and the last date to submit the ITR is July 31st.

Wrapping it up!

This article will assist the freelancers with e filing income tax. While many have been entranced by the virtues of freelancing, it is important to remember to complete all the legal and financial obligations to avoid any difficulties in the future.

Categories: Taxes

Leave a Reply

Your email address will not be published. Required fields are marked *

May 30, 2018 Income Tax Liability for Freelance Software Developers