We all know that remote working has encouraged more and more individuals to choose freelancing as a way to earn income, either part-time or full-time. However, the freedom and flexibility of going solo does not exempt one from paying taxes to the government.  As per the Income Tax Act, freelancers are liable to pay taxes to the government for the income they earn through the delivery of their services, just like any other businessperson or salaried employee. But let’s take a step back and understand the basics.

Understanding Financial Year & Assessment Year

A ‘Financial Year’ is the 12 month period that begins on 1st April and ends on 31st March of the following year. No matter when you start freelancing, the financial year closes on 31st March, and a new financial year starts on 1st April. 

The term ‘Assessment Year’ is one that you will hear a lot with reference to your income tax filing. It is the financial year after the year in which you will ‘assess’ and file your ITR for the previous year. For example, the assessment year is 2022-2023 for the previous financial year 2021-22. 

Calculating Income Tax for Freelancers

As per the Income Tax laws in India, any income you earn by using your intellectual or manual skills qualifies as income from a profession. Such income will be taxable under the head “Profits and Gains from Business or Profession”. 

The simple formula for arriving at your taxable income is:

Taxable Income = Gross Income – Total Expenses – Total Deductions

So for example, if your gross annual income is Rs. 12 lacs, your expenses amount to Rs. 4 lacs, and your deductions come up to Rs. 1 lac, your total taxable income is (10 – 3- 1) i.e Rs. 7 lacs. 

After you arrive at your total taxable income, you find out how much tax you are liable to pay. Individual taxpayers are obliged to pay income tax based on the slab system they fall under. The same taxation slabs that are applicable to salaried individuals apply to freelancers as well. 

Incomes up to Rs 2.5 lacs are not taxed. Income between Rs. 2.5 lacs to 5 lacs is taxed @ 5%, and income between Rs. 5 to 10 lacs @ 20%. Income above Rs. 10 lacs is taxed @30%.

Let’s say your taxable income is Rs. 7 lacs. Going by the tax slabs above, your total tax will be:

20% of the income that is more than Rs. 5 lacs i.e Rs. 2 lacs x 20 % = 40,000 + 12,500 = Rs. 52,500

So there you have it. As a freelancer, you are as liable as any other tax paying citizen of India. But you have several instruments at your disposal to reduce your tax burden. To be sure that you are arriving at the right taxable income and tax payable as a freelancer, it is good to have an understanding of what comprises income and expenses, and what you can claim as deductions. We will inform you about this in a future blog post.