Income Tax Return for AY 2020-21: How freelancers can file ITR?2 min read . Updated: 25 Oct 2020, 01:45 PM IST
Freelancers and consultants need to fill out and submit either ITR-3 or ITR-4.
Income tax rules for a consultant or freelancer are slightly different from the income tax rules for a salaried individual. Income as a consultant is taxed under the head “Profits and Business or Profession". Freelancers and consultants need to fill out and submit either ITR-3 or ITR-4. ITR-3 applies to income from business or profession. A freelancer can opt for presumptive taxation and declare 50% of their gross receipts as their income by filing ITR-4. There are a few deductions which are available to the salaried person which cannot be claimed by someone who is working as a freelancer. But freelancers are allowed to claim their actual expenses done with connection to work.
Filing ITR-4: Here's how presumptive taxation benefits a tax payer
As a freelancer or a professional, you can pay tax on the estimated income. This can be done using the Presumptive Taxation Scheme under section 44ADA of the Income Tax Act. However, the annual income should be below ₹50 lakh.
Suppose a freelancer's annual income is ₹45 lakh, his work-related expenses are ₹7 lakh. Without Presumptive Taxation, the freelancer can claim tax deduction on work-related expenses, so her taxable salary would be ₹38 lakh ( ₹45 lakh- ₹7 lakh).
Using Presumptive Taxation, the freelancer's taxable income will be 50% of total annual income equal to ₹22.50 lakh.
There is a huge difference between the taxable income calculated in the two methods, which will bring a huge tax difference as well.
Important points to consider for taxation of a freelancer's income:
Freelancers cannot claim the standard deduction of ₹50,000 as applicable to a salaried individual. There is no similar provision for claiming a standard deduction for a consultant against income received from free lancing.
Consultants or freelancers can claim work-related expenditure incurred on actual basis, though they are not allowed to claim any expenses which is personal in nature. The expenses can basically include internet expenses, mobile expenses, printing and stationery, conveyance expenses etc. to the extent these are related to work and not personal consumption.
Consultants can claim very small portion of house rent (if rented) and electricity expenses in respect of the house. Freelancers or consultants can claim depreciation on computer and printer used for their work. Balwant Jain explains that in addition to the depreciation, they can also claim expenses incurred on repairs and maintenance of computer and printer.
Deductions under Section 80C, 80CCD, 80D, 80TTA etc are available to individuals working as a consultant or a freelancer. "In case you are staying in a rented place you can claim the same under section 80GG upto ₹5,000 per month," says Balwant Jain. The net income arrived at is taxed at the applicable slab rate. However some capital gains are taxed at a flat rate.