Opting for presumptive tax reduces burden on freelancers: Experts

They don't have to maintain books of account or get them audited

According to a recent report by NITI Aayog, the gig economy in India employs 7.7 million individuals. This figure is expected to more than triple to 23.5 million by 2029-30. Under the Income-Tax (I-T) Act, 1961, freelancers who earn more than the basic exemption limit must file an income-tax return (ITR). The rules and processes that apply to them for filing ITR are different from those that apply to salaried individuals.

Who’s a freelancer

The I-T Act does not have a definition for freelancers. V.M. Kannan, senior associate, SKV Law Office, says, “It’s any income generated by using one’s skills and knowledge that is considered as profit and gains from business and profession.”

Instead of receiving a salary, a freelancer receives income against an invoice.

ITR 3 or ITR 4?

Freelancers can use one of two forms to file their ITR. Naveen Wadhwa, deputy general manager, Taxmann, says, “Whether a freelancer uses ITR-3 or ITR-4 depends on the nature of his income.”

If his income is eligible for the presumptive taxation scheme (PTS) under sections 44AD, 44ADA, 44AE, he must use ITR-4.

Nikhil Varma, managing partner, Miglani Varma & Co, Advocates, Solicitors, and Consultants, says, “Freelancers who don’t utilise PTS can file their returns using Form ITR-3, applicable for income from a business or profession.”

ITR-3, the most complicated ITR form, can be used by both individuals and Hindu Undivided Families (HUF). Kannan says, “If you are a director in a company, have invested in an unlisted company, or have income from capital gains, use ITR-3.”

Presumptive tax scheme

A taxpayer opting for this scheme can declare income at a prescribed rate.

The simple scheme of presumptive taxation under Section 44ADA is available to freelancers having receipts of up to Rs 50 lakh from specified professions. Moiz K. Rafique, managing partner, Privy Legal Service LLP says, “By opting for PTS, a freelancer can avoid the tedious task of maintaining books of account, provided he earns less than Rs 50 lakh during a financial year. His taxable income is calculated at 50 per cent of gross profits.”

Section 44AD applies to a person carrying out an eligible business. Wadhwa says, “The taxpayer opting for Section 44AD can compute taxable income on a presumptive basis if the turnover of his business doesn’t exceed Rs 2 crore during the year. The presumptive income shall be 6 per cent or 8 per cent of the total turnover.”

Ankit Jain, partner, Ved Jain & Associates, adds, “Even in this scheme, he is not required to maintain any books of accounts or get his books audited.”

Section 44AE

Under this scheme, the eligible taxpayer can compute the taxable income on a presumptive basis if he does not own more than 10 goods carriage vehicles during the year. Varma says, “Section 44AE applies to taxpayers in the business of plying, hiring, leasing of goods and carriages.”

Standard deduction and TDS

The standard deduction is a flat deduction of Rs 50,000 from salary income. Soayib Qureshi, associate partner, PSL Advocates & Solicitors says, “There is no provision for freelancers to claim the standard deduction of Rs 50,000, unlike salaried individuals. However, since ITR-3 and ITR-4 forms have heads for salary as well, if a freelancer receives any salary income, he may claim this deduction under the salary head.”

Freelancers can also claim refund of tax deducted at source (TDS). Jain says, “They should verify that all the tax deducted by their employers is reflected in Form 26AS.”

If it is not reflected, the tax department will not give credit and the freelancer will be forced to pay additional tax and interest.

Finally, Wadhwa says, “Opting for PTS has many benefits. The assessee doesn’t have to pay advance tax in four installments. He can instead pay the entire tax on or before March 15. He is also exempted from maintaining books of account and getting them audited.”

Pay GST if earning exceeds Rs 20 lakh

• Freelancers should be registered under the GST (Goods & Services Tax) Act if the total amount of services rendered by them exceeds Rs 20 lakh per annum 
• They are liable for Central GST, State GST and Integrated GST, depending on the place of service
• There is no exemption of GST, even if the business is online
• Obtaining a registration can help as many corporates prefer a freelancer registered under the GST Act