Personal Finance

Freelancing? Make taxes work for you

Anil Goyal | Updated on September 02, 2018 Published on September 02, 2018

Keep bills, show adequate cash drawings from income and be GST-compliant

Not everyone finds solace in the nine-to-five life. If you’ve recently taken the freelancing route in the hope of flexibility and comfort, familiarise yourself with income tax and other rules to run your business smoothly and avoid running into any trouble with the authorities. Here are a few things freelancers must keep in mind to wade through the tax territory.

Claiming deductions

First, the cost of an old asset being used for your freelance business can be used to claim depreciation. When you purchase a capital asset, its benefit is expected to last for more than a year. Every year, a small portion of its cost is expensed, which is then reduced from your income. For instance, when you buy a laptop for ₹60,000 for your freelance work, it is considered an asset. Assuming a straight- line depreciation of 33.33 per cent, ₹20,000 shall be charged as expenses each year. The Income Tax Act lays down the rules for methods of depreciation and rates of depreciation to be charged, depending on the type of assets. Keep bills of such assets secure.

Next, all business-related expenses (not personal) can be claimed against income. So one must keep the related bills secure to claim expense. This could be expenses such as office rent, travel, business dinner, etc. To claim expenses as deductions from freelancing income, the amount should have been spent fully and exclusively for the purpose of your work during the tax year. It should not be a capital expenditure or a personal expenditure of the freelancer.

Many people claim a lot of expenses to show lesser-than-actual income. However, it is also important you show adequate cash drawings from your income that would be reasonably required to meet regular household expenses. Else, suspicions can arise about over-claiming of expenses.

Be GST-compliant

Whether you sell goods or provide services as a freelancer, GST shall be applicable if your total revenue is more than ₹20 lakh. GST payments can be easily done online. Filing online is mandatory if your payments exceed ₹10,000. The GST amount has to be deposited with the government either quarterly or monthly, based on your composition scheme and turnover.

Freelancing income is typically received upon completion and submission of work. For all incomes, raise a proper invoice with GST (if applicable). It is unlawful to charge GST on your invoice if you don’t have a GST number, even if GST is applicable to you; so get a GST number as soon as it becomes applicable. Raising proper invoices with serial numbers is also a good practice to follow in order to keep documentation.

Lastly, if your turnover crosses a certain limit in a year, a tax audit is required for proper compliance with the income tax laws.

A tax audit means you need to maintain books of accounts and have a CA sign off that your books are correctly maintained. Contact your CA for guidance on the matter and other compliance requirements. TDS need to be deducted on certain payments to third parties and deposited with the tax authorities.

The writer is Managing Partner, Anil K Goyal and Associates.

Published on September 02, 2018
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