Introduction: Freelancers, thriving in the dynamic gig economy, bring diverse skills to industries. However, many aren’t aware of the legal complexities governing their work. In this article, we delve into the crucial aspects of legal compliance for freelancers, covering income tax, TDS liability, GST, and specific considerations for those serving foreign clients.

Freelancers are individuals who work as independent contractors, providing services to clients or businesses on a project-by-project basis. Unlike traditional employees, freelancers are not bound by long-term employment contracts and typically work on a temporary or contractual basis. They offer a diverse range of skills and services across various industries, and freelancing has become an increasingly popular and viable career option in the modern workforce. However most of the Freelancers aren’t aware of the legal compliance applicable to them, so in today’s article we will discuss about such compliances.

Income Tax:

According to the Income Tax law, any income generated by an individual through their manual or intellectual skills is considered a profession and is taxable under the category of Profits and Gains from Business and Profession.

If Your Total Receipts* < 50 Lakhs:

1. Presumptive Taxation Scheme 44ADA:

– Freelancers only need to pay tax on 50% of their total receipts.

– No claim for expenses or assets is allowed under this scheme.

2. Audit U/s 44AB:

– Freelancers can pay tax on their actual income, considering all legitimate expenses such as rent, salaries, fuel, electricity, repairs, etc.

– Depreciation can also be claimed for assets used in the profession.

If Your Total Receipts > 50 Lakhs:

– Freelancers are required to opt for Audit U/s 44AB, following the same conditions as mentioned above.

It is mandatory to file your Income Tax Return (ITR) if your receipts are equal to or greater than 10 Lakhs. Failure to comply with this requirement may result in serious consequences.

TDS Liability:

TDS (Tax Deducted at Source) is applicable when a freelancer’s receipts exceed Rs. 50 Lakhs. In such cases, the freelancer needs to deduct a certain percentage of the payment before disbursing it to employees, professionals, rent, expenses, interest, etc. Detailed explanation and rate categorization should be sought for a better understanding.

Overview of Taxation and Compliances Applicable to Freelancers

Goods and Services Tax (GST):

GST compliance is a crucial aspect that freelancers need to consider. If your receipts exceed Rs. 20 Lakhs in a financial year, you are mandatorily required to register for GST and charge GST at a rate of 18% from your clients. This GST amount needs to be paid to the respective government authorities.

Export Cases(Means Serving Foreign Clients)

For freelancers engaged in providing services across borders:

– Option 1: Pay taxes and claim a refund of the same.

– Option 2: Get exemption from paying taxes by submitting a Letter of Undertaking along with proof of receiving payment in foreign currency (Foreign Inward Remittance Certificate or FIRC which can easily be obtained from the payment merchant you are using to receive payments).

If you are liable to be registered under GST, you must adhere to GST laws by

  • Issuing invoices as per the prescribed format,
  • Maintaining books of accounts,
  • Filing monthly/quarterly returns and
  • Paying taxes, among other obligations.

Non-compliance with GST requirements can lead to serious complications, including penalties of up to 100% of the tax liability and an interest charge of 1.5% per month.

Conclusion: For freelancers, legal compliance is not just a formality but a safeguard against potential consequences. From Income Tax to TDS and GST, understanding and adhering to these regulations is crucial. This comprehensive guide aims to equip freelancers with the knowledge needed to navigate the legal landscape, ensuring a smooth and secure freelancing career. Consulting professionals for transaction categorization is advised to guarantee accurate compliance.

Author Bio

Qualification: CA in Practice
Company: Yash Maheshwari & Co
Location: Indore, Madhya Pradesh, India
Member Since: 05 Feb 2024 | Total Posts: 6
Hi, I'm Yash Maheshwari, a 24-year-old Chartered Accountant based in Indore and Pipariya. With a qualification earned in the May 2022 exams, I specialize in Income Tax, GST, Personal and Corporate Taxation, Assessments, and Legal Compliance. As a dedicated CA in practice, my mission is to simplify c View Full Profile

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February 2024