Freelancers pay less taxes legally

Tax systems around the world are developed to favour businesses over employees. Salaried people pay the most taxes as they have no control. The Government has made it mandatory for companies to calculate their employee's income tax, deduct TDS every month and deposit it with the Government. One has to work hard to save taxes using HRA, 80C, 80D etc. People in the 30%+ tax bracket bear the most pain as they have to pay higher income tax and indirect taxes like GST.

Freelancing is a one-person business. Freelancers can save a lot of taxes. But to do that, they have to improve their finance knowledge. It is good to know how the tax system works. In this post, I will share the tax benefits one can enjoy as a freelancer.

Salaried people spend using tax-paid money

Salaried people get the money in their bank account after income tax has already been deducted. The expenses they will make now are using the tax-paid money. The mobile phone he/she will buy is purchased using tax-paid money.

Any guess how it will work for freelancers?

Freelancers are in total control of their taxes. They will pay taxes on the profits generated at the end of the financial year while filing their income tax return. A freelancer will purchase the mobile phone and take the benefit of depreciation. For a freelancer, there is little difference between him and the business. They will use the same phone to access Slack for business purposes and WhatsApp for personal use. It will be considered a business asset. Using the depreciation rule, a certain percentage of asset value will be reduced from total tax each year. The mobile phone will depreciate with time. One can also take a GST refund via ITC (input tax credit) if one has a GST number.

Do not worry if it seems complex. The point is freelancers can use depreciation of assets to their advantage. Devices like phones and laptops depreciate with time. So, a certain percentage of asset value is reduced from payable tax. Assets have different allowed percentages of depreciation. Please note that for taking the benefit of depreciation, the assets should be used for business purposes fully or partially.

Expenses like phone bills, coworking space rent, flight to meet a client, hotel stay etc. can be fully deducted. Income tax will be paid only on the amount left after reducing the expenses and depreciation.

Section 44ADA – Presumptive Tax for Professionals

It sounds nice that we can save taxes using the expenses and depreciation. But who will keep track of expenses? It can be difficult for a single person to focus on their professional work and taxes. For freelancing professionals, the Government has made it very easy to pay lesser taxes. Consider your revenue is 16 lakhs per year. The expenses will be presumed at 50% (8 lakhs). You will have to pay income tax on a profit of 8 lakhs. You do not need to keep track of your expenses, calculate depreciation and manage books of accounts.

Do you have more expenses than 50%? 44ADA will not be applicable. One has to maintain books to calculate the actual profits. The business expenses and assets depreciation will help to reduce your total tax outgo.

I hope you get an idea of how businesses pay lesser taxes. Always take the help of a professional CA to reduce your tax outgo legally. I have noticed people try to do tax-related things themselves like filing ITR, GST returns etc. It is advised to hire a CA to perform the legal work. The CA will help to reduce your tax outgo. The tax CA saves is more than their fees.

This post is part of the #DecidingToFreelance series. Check out the following related post from this series. Also, consider subscribing to this newsletter. Your support will motivate me to write posts often.