Freelancing and taxes: What you need to know
What's the story
The gig economy, fueled by platforms such as Airbnb, Uber, and freelance job marketplaces, has become a significant source of income for many Indians.
However, comprehending the tax liabilities associated with gig earnings is essential for both compliance and financial planning.
This article explores the critical sections of the Income Tax Act pertaining to gig earnings in India.
Slabs
Understanding income tax slabs
Income earned from the collaborative economy is taxable under the category of "Income from Other Sources" or "Profits and Gains from Business or Profession," depending on whether the activity is occasional or regular.
For those under 60 years, the income threshold for tax exemption is ₹250,000.
Tax rates start at 5% for incomes ranging from ₹250,001 to ₹500,000 and go up to 30% for incomes exceeding ₹1,000,000.
Deductions
Deductions available for freelancers
Freelancers are eligible for deductions under Sections 80C to 80U of the Income Tax Act.
They can invest in ELSS funds, PPF accounts, or pay life insurance premiums up to ₹1,50,000 annually for deductions under Section 80C.
Plus, expenses incurred for freelancing, like internet bills or rent for office space, can be deducted from your income, lowering your taxable income.
GST
GST implications on collaborative economy earnings
Individuals earning over ₹20 lakh p.a. on collaborative platforms are required to register for GST. For northeastern states, the limit is ₹10 lakh.
Services rendered attract GST ranging from 5% to 18%, depending on the type of service.
Once registered, it is crucial to issue GST-compliant invoices and file periodic returns.
Reporting
Reporting requirements and compliance
Taxpayers are required to disclose their income accurately by filing an annual return using either Form ITR-3 or ITR-4, depending on their circumstances.
ITR-3 is for individuals earning income from a profession that requires skills (doctors, lawyers, etc.) and ITR-4 is for those opting for the presumptive taxation scheme under Section 44AD/AE/ADA, which simplifies compliance by presuming a fixed percentage of turnover as profit.
Management
Tips for managing taxes efficiently
Keeping a comprehensive record of all transactions, particularly expenses that can be claimed as deductions, can greatly simplify tax filing processes.
Using digital accounting tools ensures effective tracking of income and expenses throughout the year.
Starting investment planning at the beginning of the financial year enables informed decisions about tax-saving instruments, which can reduce taxable income.
Procrastination is detrimental to efficient tax management.