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A Comprehensive Guide on Tax for Freelancers

We had a lot of people ask us for this. Here's what we cover in this post:

1. Example - GST v Income Tax

2. Income Tax provisions for Freelancers

  • Income from profession

  • The Legendary Section 44ADA

  • What to do if you cross the magical INR 50 lakh number?

  • Case Study - Freelance and Full-time Salary income

  • Case Study - Services rendered to overseas Company

3. GST provisions for Freelancers

  • Registration under GST

  • Export of services and filing an LUT

  • Case Study - Freelance and Full-time Salary income

  • Case Study - Services rendered to overseas Company

  • What to do if you cross the magical INR 20 lakh number?

First thing you need to understand is that Income Tax and GST are 2 completely different Acts and tax different things. Let's illustrate quickly with a simplified example.

Example - GST v Income Tax


Mr. India earns INR 1 crore by selling services to Indian parties. This is professional income for Mr. India. GST on these services applies at 18%.


GST

Mr. India will collect the following amount from his clients:

This INR 18,00,000 of GST collected will be paid to the Government. Accordingly, GST is an indirect tax - the clients bear the burden of this amount.


Note - In some cases, practically - you may end up paying GST out of your pocket. We'll explain that below in this article


Income Tax

Mr. India will be liable to pay income tax on this INR 1 crore at slab rates. This is a tax on your income - a Direct Tax. This goes out of your pocket.


Obviously, there's more to both of the Acts (which we will explain below), but this should help you understand the basic difference between the 2 types of taxes you need to worry about.

Income Tax provisions for Freelancers


Your income from freelancing is taxable under the head Income from profession. Details of income and expenditure under the provisions of Income from Profession are available here.


We know you're not here for that. You're here because you heard of this mythical section called Section 44ADA.


The Legendary Section 44ADA


Presumptive scheme of tax

Under the presumptive scheme of taxation, profits are presumed at 50% of the gross receipts.


Eligible Assessees

Any assessee resident in India.


Turnover Limit & Eligible professions

Professionals mentioned below, whose total gross receipts are less than INR 50 lakh in a year can avail benefit of the presumptive taxation scheme.

  • Interior decorations

  • Technical consulting

  • Engineering

  • Accounting

  • Legal

  • Medical

  • Architecture

  • Other professionals, as mentioned below:

a. Movie artists including a producer, editor, actor, director, music director, art director, dance director, cameraman, singer, lyricist, story writer, screenplay or dialogue writer and costume designers


b. Authorised representative meaning a person who represents another person for a fee before a tribunal or any authority constituted under any law. It does not include an employee of the person so represented or a person who is carrying on the profession of accountancy


c. Any other notified professionals


So how does this work?


It's simple. You show only 50% of your revenue as income. Let us explain with a simple example.


Example:

Tony Singh, an Indian Resident, provides software development services to Avengers Inc. (A US Company). His revenue from services is INR 40,00,000. He incurs very little expenditure in India amounting to INR 2,00,000.


Income under Section 44ADA

Income under Normal Provisions

Clearly, Section 44ADA is beneficial for Tony. He has to pay tax on this INR 20,00,000 at slab rates.


My actual expenses are much lower than 50% of my revenue. Can I still use Section 44ADA?


This is an established provision where your actual expenses are not reviewed by the Income Tax Department. You can show 50% as income, no questions asked.


Other Benefits under Section 44ADA

  • No need of maintaining books required under Section 44AA

  • No requirement of having accounts audited under Section 44AB


When shall an assessee maintain books and get the accounts audited?:

  • Income from profession is offered at a lower rate than 50% of the gross receipts

  • Total income of the assessee is more than the basic exemption

What to do if you cross the magical INR 50 lakh number?


You've been using Section 44ADA for a few years now. But you expect your revenue to cross INR 50 lakhs next year.


You've come to the unfortunate conclusion that if your revenue from profession exceeds INR 50 lakh by even INR 1, your tax liability may triple. How do you fix this?


We've been able to work this out for clients. It's too specific and depends too much on the facts and circumstances of each case. However, some of the options we've explored with our clients include the following:

  • Splitting of revenue between different entities/ individuals

  • Setting up of new entities

  • Exploring options under Section 44AD


Case Study - Freelance and Full-time Salary income


Mr. Multitasker works a day job at NetMeTube+ and earns salary of INR 50,00,000 in a year (after considering all deductions under the Income tax Act). He recently discovered the world of freelancing and receives INR 45,00,000 from freelancing work done in his spare time through sites such as Upwork and Freelancer. He also invests INR 1,50,000 in PPF account every year. This is his only deduction under Chapter VI-A.


We have avoided getting into the deductions for salary to keep this article at a readable length. For provisions of Income from salary - refer here.


How is his tax calculated?