Understanding salary and freelance taxation in India
Taxation in India is a tale of two worlds: one for salaried employees and another for freelancers. Although both are taxed under the same Income Tax Act of 1961, the way their income is taxed and the deductions they can claim are different. This article delves into these differences to shed light on the complex world of taxation for both salaried employees and freelancers in India.
Salary taxation: Basics and deductions
Salaried individuals get a predetermined sum of money from their employer every month. Their income tax is determined by their salary slab, which can be anywhere between 5% and 30%s, depending on the total income they earn in a year. Employers withhold this tax at source under Section 192 of the Income Tax Act. This is called TDS (Tax Deducted at Source).
Freelance taxation: A different approach
Freelancers make money by providing services or selling products to different clients. Their income is classified as business or professional income. They are taxed on net income, meaning they can deduct expenses related to their work before calculating tax. Tax rates are the same as for salaried employees (10% to 30%), but the advantage for freelancers is that these rates apply after deducting expenses.
Deductions unique to freelancers
One major benefit for freelancers is that they can deduct any expenses related to their work before tax. This means things like internet and phone bills, depreciation on your work equipment, travel costs, and even rent for your home office. By claiming these deductions, you can significantly reduce your taxable income.
Advance tax: Planning ahead
Both salaried employees and freelancers are required to pay advance tax if their tax liability exceeds ₹10,000 in a financial year. However, unlike most salaried individuals whose advance tax obligations are covered by TDS (automatically deducted by employers throughout the year), freelancers must calculate and pay these taxes themselves. They are required to pay it in four installments throughout the year based on their estimated earnings.
Keeping records: A must for freelancers
For freelancers, keeping a comprehensive record of all transactions is vital. It helps not only in accurately determining taxes but also in justifying any deductions claimed at the time of filing returns. This means you should store invoices, bank statements, receipts of expenses you paid to earn your freelancing income, and any other documents that establish what you earned and what you spent.
