Tax Saving Tips for Freelancers in India in 2024: Maximise Your Savings

Are you a freelancer worried about paying too much tax on your income? You're not the only one. Many freelancers in India struggle with tax issues. Unlike regular jobs, freelancers don't have taxes taken out of their pay automatically. This can make tax time overwhelming.

But there's good news. You can lower your tax bill with some smart planning. This blog post will give you simple tips and strategies to save on taxes. These tips are useful whether you're new to freelancing or have been doing it for a while. 

Let's make tax time less stressful and more beneficial for you.

​Understanding Tax Obligations for Freelancers in India​

​As a freelancer, the money you make falls under income from a profession or business according to the Income Tax Act. This means you're taxed just like anyone else, with the tax rate increasing as your income grows.

How Freelance Income is Taxed in India?

Freelance income in India is subject to tax just like any other form of income. The amount of tax you owe is calculated based on the net income you earn from your freelancing work after deducting allowable expenses.

These expenses include all the direct expenses you make to make your work happen for example, rent, software tools, internet costs, phone bills, etc. 

For example, let’s consider Prateek, a freelance video editor based in India earns an annual income of Rs.8,00,000 from multiple clients. In addition to his income, he incurs various expenses such as:

• Internet & phone bills: Rs.20,000​
  
• ​Rent for his home office: Rs.1,20,000 (only 50% is used for work purposes, so eligible claim is Rs.60,000)
  
• Equipment depreciation (laptop and editing software): Rs.40,000
  
• Other miscellaneous expenses directly related to his work: Rs.30,000
  

​Calculating his taxable income:

1. ​Gross Income: Rs.8,00,000
2. ​Total Deductible Expenses: Rs.20,000 (internet + phone) + Rs.60,000 (home office rent) + Rs.40,000 (equipment depreciation) + Rs.30,000 (miscellaneous) = Rs.1,50,000
   
3. Net Taxable Income: Gross Income [Rs.8,00,000] - Total Deductible Expenses [Rs.1,50,000] = Rs.6,50,000
   

This is the net taxable income of Prateek (if he isn’t doing any salaried or full-time  job). 

You can see the real game changers are the deductible expenses, if you can manage these deductions smartly then your taxable income can be reduced significantly.

​Advance Tax

Advance tax means paying your income tax in installments, as prescribed by the income tax department, rather than paying at the end of the financial year. But, not all freelancers are liable to pay advance tax. Freelancers, those who owe a quarterly tax of more than 10,000, are mandatory to pay advance tax. The deadlines for these payments are spread throughout the year.

If you don’t pay the advance tax then you incur a penalty and interest under sections 234B and 234C of the Income Tax Act. And, the penalty can be very high and hence it is recommended to estimate your annual income accurately and make these payments to avoid any penalty and extra charges.

​How to Structure Your Income for Tax Efficiency?​

As a freelancer, understanding how to structure your income can lead to significant tax savings and financial benefits. There are two strategic approaches that you can use to maximise your savings.

1. Presumptive Taxation Scheme under Section 44ADA
2. Incorporating your business
   

​Let’s understand each in detail.

​Presumptive Taxation Scheme (PTS) under Section 44ADA​

​This scheme is a simplified tax scheme designed to ease the burden of tax compliance for small taxpayers. Freelancers, whose total freelance incomes in a financial year is less than Rs.50,00,000 are eligible to opt for this scheme.

1. Simplified Tax Filing: Under PTS, you are allowed to declare 50% of your total gross receipts or turnover as your income and pay taxes on this amount. There’s no need to maintain books of accounts or deduct expenses if you opt for this scheme.
2. ​Lower Tax Liability: By presuming income at 50% of your turnover, you may significantly lower your taxable incomes, especially if your actual expenses are less than 50% of your receipts.
3. ​Avoidance of Advance Tax Penalties: If you opt for PTS, you’re also exempt from the quarterly advance tax payments. We’ve already discussed advance taxes in the previous section.

This scheme is beneficial for those freelancers who have high gross receipts but relatively low expenses. It enables them to reduce their tax workload and potentially their tax liability.

For example, let’s consider the same scenario of Prateek. 

Without PTS, his taxable income is Rs.6,50,000

With PTS,

Gross Income: Rs. 8,00,000

Presumed Income under PTS (50% of Gross Incomes): Rs. 4,00,000

Thus, his taxable income would be considered as Rs. 4,00,000, regardless of his actual expenses. 

​Incorporating Your Business​

If you’re planning to continue in your freelancing business and your freelancing income keeps on increasing then incorporating your business can be a strategic approach. It can help in optimising your tax situation. 

What are the benefits of incorporating your business?

1. ​Tax Savings: A private limited company or a limited liability partnership (LLP) may have lower tax rates compared to individual tax slabs, especially if your income is high. Additionally, companies can claim various deductions and benefits not available to individuals.
2. ​Limited Liability: Incorporation separates your personal assets from your business liabilities, providing a safety net in case of business-related legal issues.
   

Which one should you choose - PTS or Incorporating a Business?

The answer may vary depending on the specific situation and goals and hence we advise you to consult with a tax professional or CA to determine the best for you.

​Key Deductions and Exemptions You Must Leverage​

There are various available deductions and exemptions you can leverage to significantly reduce your taxable income. Here’re some critical areas to maximise your savings:

​Investments Under Section 80C​

​Under section 80C of the Income Tax Act, you can claim up to Rs.1.5 lakhs per annum on investments made in:

1. Public Provident Fund (PPF): A long-term investment option backed by the Government of India, offering tax-free returns.
2. Equity-Linked Savings Scheme (ELSS): Mutual funds that not only provide the potential for high returns but also offer tax benefits.
   
3. ​National Pension Scheme (NPS): A pension cum investment scheme that not only secures your retirement but also offers additional tax benefits over and above the Rs. 1.5 lakhs limit under 80CCD(1B) up to Rs. 50,000.
   
4. ​5-Year Fixed Deposits with Banks: These are tax-saving fixed deposits that lock in your investment for five years, offering a deduction under 80C.
   

​Health Insurance Premium (Section 80D)​

​Section 80D allows deductions for premiums paid on health insurance:

1. For Self and Family: Deduct up to Rs.25,000 per annum on insurance for yourself, your spouse, and dependent children.
   
2. ​For Parents: An additional deduction up to Rs.25,000 for insuring your parents (Rs.50,000 if your parents are senior citizens).
   

​Home Loan Benefits​

​A home loan doesn’t just help you own your dream house but also offers tax saving opportunities:

1. Interest Deduction (Section 24): Deduct up to Rs.2 lakhs on the interest paid on your home loan for a self-occupied property.
   
2. ​Principal Repayment (Section 80C): The principal amount repaid annually on your home loan is also eligible for deduction under the Rs.1.5 lakhs limit of Section 80C.
   

​Education Loan Interest (Section 80E)​

​Investing in higher education can be financially taxing, but the government offers in relief in the form of tax deductions:

1. Deductibility of Interest: The interest paid on loans taken for higher education (for self, spouse, children, or a student for whom you’re a legal guardian) is deductible under Section 80E. There’s no upper limit on the amount that can be deducted, and the benefits can be availed for a period of 8 years or until the interest is paid off, whichever is earlier.
   

​If you leverage these deductions and exemptions, you can significantly reduce your taxable income, leading to substantial tax savings.

​Tax-Benefits of Timely GST Filing​

GST registration becomes mandatory once your turnover exceeds Rs.20 lakhs annually for services. For northeastern and hill states, this limit is Rs.10 lakhs. Once you cross this threshold, you need to charge GST to your clients and comply with GST filing requirements. Even if your turnover is below this limit, you can opt for voluntary GST registration. 

One of the most significant advantages of being GST-registered and filing your returns timeline is the ability to claim the input tax credit. This means you can deduct the GST you have paid on your business-related purchases and expenses from the GST you need to pay on your services. Effectively, this reduces the overall tax you pay, improving your profit margins.

​Practical Tips for tax Planning and Savings​

​Effective tax planning and saving are crucial for freelancers who manage their financial affairs independently. Here are some practical tips to navigate your taxes efficiently and secure your financial future.

​Maintaining Records​

As a freelancer, it is crucial for you to maintain your records in the accounts books. Here’s why:

1. ​Facilitates Accurate Tax Filings: Keeping a detailed record of all your income and expenses ensures that you can file your taxes accurately, minimising the risk of errors that could lead to penalties or audits.
2. ​Optimises Deductions: By documenting your business-related expenses, you can optimise your eligible deductions reducing your taxable income and, consequently, your tax liability.
3. ​Streamlines Financial Management: Good record-keeping practices help you monitor the financial health of your freelance business. It aids in budgeting, forecasting, and decision-making.
   
4. ​Tools and Apps: Exploring digital tools and apps designed for financial management can simplify this process. This will allow you to keep digital receipts, track expenses in real-time, and categorise sources efficiently.
   

​Hiring a Professional​

As your freelance business grows, your financial situation may become more complex, involving multiple income streams.

To Wrap it up!

If you implement the tips and strategies outlined in this blog then this can lead to significant tax savings. It allows you to retain more of your hard-earned money.

From structuring your income wisely with the Presumptive Taxation Scheme to making informed decisions about investments under Section 80C, each step you take towards optimising your tax situation contributes to your overall financial health. Take charge of your tax planning today, and maximise your savings.