How a Freelancer should file his ITR returns?

How a Freelancer should file his ITR returns?

How a Freelancer should file his ITR returns?

Modern technological advancements have brought multiple changes especially in matters of education and employment. Though each one comes with its own fair share for positives and negatives, regular employment could have job security and service benefits whereas freelancing can give a person the freedom to make his own decisions.

However, a freelancer is required to constantly strike a balance between the current projects and completing them and look for new projects at the same time. If they fail in doing both these things, they could find themselves without any work lined up.

Freelancers have short-term goals of finishing a project, getting paid, and moving onto the next job. There are some exclusions, thus freelancer requires a delicate balance of working on current projects and while always keeping an eye on the future. If you are a freelancer actively working in your career, there may be times where a slight delusion about your role may lead could have a huge impact on your taxes, your benefits, and your salary.

Before discussing further the tax mannerisms for a freelancer, let’s know a little about the tax systems in India-

Comparison and Classification for job matters:

Though terms like freelance and independent contractors are often used interchangeably, there is less awareness regarding its points of indifferences which often causes disturbances among the masses.

When it comes to define and assess the distinctions between terms like an employee, independent contractor, and freelancer when it comes to definitions, the only ones that matter is those which are prescribed by the Internal Revenue Services (IRS). It defines the employment type and status of an individual based on the nature of the relationship with the employer.

While defining your employment’s nature is at the accountability of your employer’s accountability, it becomes a pertinent matter for you to understand IRS classifications and their basis. When it comes to taxes, the IRS places independent contractors and freelancers place both of them in a similar group (namely as independent contractors). 

Having said that there are some divergent differences between the employees and independent contractors (freelancers) of any stripe.

i.    Employee vs. Independent Contractor relationship:

For determining the nature of employment, the IRS observes three aspects to determine whether you are an employee or an independent contractor. 

a.    Behavioral control: Who decides when, where, and how you work?

b.    Financial control: Who administers and directs the financial and business aspects of your job?

c.    Relationship control: Does the employer provide service benefits, and is there an end date to such employment?

Thus, to classify whether you are an employee or not, you need to satisfy the following conditions which provide-

•    As an employee, your employer administers and takes decisions regarding when, where, and how you work. For instance, if your employer tells you to have to be at an office every day (or online) during primary business hours, provides a laptop for your job, and provide instructions on how to perform your job.

•    The matters related to payments, if you are eligible for a raise or bonuses and then  reimburses you for job-related expenses are decided by your employer;

•    You are eligible for employment benefits (like retirement and health insurance) and presumes you to work at the company till you either quit or get terminated.

On the other hand, an independent contractor has a dissimilar relationship with their employer. 

According to IRS, an independent contractor (including a freelancer) is the one who has-

•    Freedom to make decisions as to when, where, and how to work without any restrictions (with some exceptions).

•    Has the freedom to decide his own payments and to choose the entity he wants to work with.

•    Is not eligible for employee benefits along with a specified end-date.

However, this leaves us with one more question, is there any difference between an independent contractor and a freelancer, or are both of these the same?

ii.   An  Independent Contractor vs. Freelancer:

While the IRS considers the independent contractors and freelancers in a similar genus for tax purposes, there is a need to draw a thin line between these two jobs.

Accordingly, IRS defines an independent contractor means someone is an independent contractor if they’re “involved in an independent trade, business, or profession through which offer their services to the general public.”

Accordingly, the IRS lists certain professions as independent contractors for instance professionals like Doctors, dentists, lawyers, and auctioneers, etc.

Independent contractors usually prefer to take a few projects at a time but for long durations such as for four-five years or more.  For instance, an independent contractor may undertake a home improvement project. But, it’s possible that the project is one out of three projects taken by him in years thus, once your project is completed, the independent contractor shall move on from your project to another one.

Whereas Freelancer engages themselves into smaller multiple projects of comparatively shorter duration as much as they can handle at a time. A freelancer may undertake and complete one project and looking for future projects then move on to another employer. 

iii. Freelancer vs Employee

Generally, it is the responsibility of the employer to assess taxes for their behalf and withholding the correct amounts of taxes owed before issuing paychecks to their employees. Thus, it is relatively easier to file their income –tax returns. The employers have HR Managers who send Form 16 to the employees and requiring them to be filled along with the guidelines about tax filing deadlines as well as tax saving obligations. 

It is slightly complicated for ITR fillings for freelancers as they have different income tax sources and are responsible for paying their own income tax and self-employment tax.

Some of the benefits of filing ITRs as an independent contractor are tax write-offs, expenses like home office deduction, and other related business expenses.

Now, let’s discuss the tax aspects for a freelancer-

How to select the preferred accounting method freelancers?

Career as a Freelancer could prove to be a lucrative one, causing more and more individuals drawn towards it. Nevertheless, filing tax returns for a freelancer could be slightly intricate as compared to salaried individuals.

Salaried individuals to file their returns in Form16 to file their returns easily, a freelancer may have difficulty in filling returns owing to their multiple income sources. Here is a quick breakdown of the process of the return filing process for freelancers-

1.    Freelancing Income:

A person earning from an intellectual or manual skill, such income comes under Profits and Gains of Business & Profession. The income accrued from such assignments for a specified period of time is also referred to as Freelancing Income

Know Your Tax Slabs- For the year 2020

Up to Rs 2.5 lakhNIL
Rs 2.5 lakh to Rs 5 lakh5% (Tax rebate of Rs 12,500 available under section 87A)
Rs 5 lakh to Rs 7.5 lakh 10%
Rs 7.5 lakh to Rs 10 lakh15%
Rs 10 lakh to Rs 12.5 lakh20%
Rs 12.5 lakh to Rs 15 lakh25%
Rs 15 lakh and above30%


2.    TDS is deducted from your payment:

Every professional service rendered by you is subject to 10% TDS (Tax Deducted from Source) under Section 194J of the Income Tax Act for which a refund could also be obtained for every professional service rendered. 

The income tax provisions provide that a person shall be obligated to pay a certain sum of money to any other person he will be deducting tax at source and deposit it with the government. However, while paying taxes he is open to take credit for or claim a refund of TDS in the same manner as salaried persons.

3.    Claiming expenses reduces tax liability:

A freelancer is open to claim his expenses as any other businessman for income-tax purposes incurred towards his work to reduce his tax payments. Certain expenses that could be allowed to be claimed are listed under heads of rent, repairs, depreciation, office expenses, travel expenses, and even meals, hospitality expenses. 

However, such expenses must be interrelated to his business income earnings to be allowed to be deducted from your receipts. For instance, if a freelancer employs a software developer to assist him in his assignment, a freelancer can claim the costs made for purchasing software or maybe for testing an Android application.

Further, a freelancer must deduct costs from the annual turnover such as for depreciation for wear and tear of his equipment. For instance, a professional photographer freelancer can claim depreciation collected towards the printing equipment and the camera. 

4.    Include Income from Other Sources:

Apart from the professional or business income, a freelancer must disclose his income earned and received from the other sources under ITR. 

Some of such incomes are as below-

i)    Income from House Property-

If the freelancer concerned owns a house property and lets it on rental, it shall be assumed that he is in receipt of certain income as a rental income. Therefore, when a person receives rental earnings from a property on rent such income is taxed as an income from House-property.

ii)    Income under capital gains-

Investing in capital and money market is in vogue for most of the businesses as it has possibilities of earning higher yields including for freelancers. Thus, any income earned from equity shares, debentures, bonds, etc. are to be taxed under the head capital gains for the purpose of Income-Tax.

iii)    Income from Salary -

While having the freedom to work freely could be a plus for freelancers, some prefer to engage themselves in part-time jobs for various intentions. Well, if a freelancer works as an employee for a part-time job, such income may be taxed under the head of “Salary” for the purposes of income-Tax.

iv)    Income from other Sources-

If a freelancer receives interest incomes from fixed deposits or from post office saving schemes. Such incomes shall be taxed as income from other sources.

5.    Tax methods and related payments:

If a freelancer chooses a simple and regular method to pay his taxes he may be able to save money on his tax payments. For the purposes of the Income-Tax Act, 1961 section 44AA and Rule 6F provide that the freelancers must maintain an accounts book for the purposes of taxation on the fulfillment of certain conditions.

Following conditions must be satisfied to allow deductions under the Income-Tax Act-

i.    Expenses incurred must be directly linked with the freelancing work;

ii.    The whole amount of expenses must be expended in relation to freelancing;

iii.    Such costs and expenses must be sustained during the financial year.

iv.    None of the expenses must be the personal expenditure of the freelancer.

Some of the expenses allowed to claim as a deduction are as follows-

•    rental amount of the property;

•    Expenses incurred on repairs;

•    Depreciation claims;

•    Office expenditure;

•    Travelling;

•    Applicable Local taxes and insurance for the property

•    Other related costs such as domain registration, apps purchases for product testing, etc.

Additionally, Freelancers can also claim various deductions provided under section 80C to 80U which if they satisfy certain conditions can claim a refund under the Act which can go up to 1.5lakh on making such investments.

Thus, the total taxable income and tax payable shall be-

Net Taxable Income = Gross Taxable Income – Deductions

6.    Applicable forms for Freelancers- ITR-3 or ITR-4?

The ITR form ITR-3 or ITR-4 could be applicable for freelancers and consultants under the income tax provisions. Since AY 2017-18 (PY 2016-17), professionals can choose for presumptive taxation and declare 50% of their gross receipts as their income by filing ITR-4.me professionals may choose the presumptive taxation scheme and declare 50% of their gross receipts as income in ITR-4 form. Also, there are several online ITR filing platforms offering affordable pricing plans for freelancers and independent consultants especially.

7.    Advance tax:

If your freelance income exceeds 10,000 in a financial year, they shall be obligated to submit advance tax for that year.

So, if you are one of them, you probably need to do the following-

a)    Gather the sum of all your receipts and assess your total income.

b)    Deduct your allowable expenses.

c)    Evaluate the receipts from other heads of income except for your business or profession;

d)    Observe the category of tax slab you are into and determine rate while remembering to deduct taxes;

1st InstalmentOn  or before June 15, 202015% of the total advance tax.
2nd installmentOn or before Sept 15, 202045% of the total advance tax less earlier installment
3rd installment On or before Dec 15, 202075% of the total advance tax less previous installment.
4th installment On or before March 15, 2021100% of the advance tax less earlier installment;


A person who is liable to pay tax in advance and fails to make payments shall be subject to a penalty for the purposes of the Income-tax Act under section 234B and Section 234C.


Nevertheless, no job is smaller or larger indeed as long as it satisfies your passion and gives you happiness. Freelancing has gained quite popularity in modern times given a wide range of exposure it gives at the same time without the pressure of being in a regular employer-employee relationship.

However, it is to be noted that a freelancer must take care of applicable compliances like income-tax returns to be filed regularly every year which if filed regularly may prove to be beneficial and may lead to unscrupulous consequences if not taken due care and caution for a business.


eStartIndia Team

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