Yes, Your Side Income Is Taxable
First things first: any income you earn, whether from your primary job or a freelance project, is taxable. The Income Tax Act requires you to report all earnings. Your freelance income is typically classified as 'Profits and Gains from Business or Profession'.
This is separate from your salary income, and you cannot use the simple ITR-1 form meant for salaried individuals if you have professional income. You'll need to file a more detailed return, usually ITR-3 or ITR-4, to report both your salary and your freelance earnings.
The Magic of Presumptive Taxation
For many freelancers, the simplest way to handle taxes is through the Presumptive Taxation Scheme under Section 44ADA. If you are a specified professional (like a writer, designer, consultant, or engineer) and your gross annual freelance receipts are below ₹75 lakh (with at least 95% of receipts via digital modes), you can opt for this scheme. Under 44ADA, you can declare 50% of your gross receipts as your taxable income, and the other 50% is assumed to be your expenses. You don't need to maintain detailed books of accounts or get them audited, which significantly simplifies compliance. You then pay tax on this 50% income according to your applicable slab rate.
Choosing the Right ITR Form
Since you have both salary and freelance income, choosing the correct Income Tax Return (ITR) form is crucial. If you opt for the presumptive scheme under Section 44ADA, you should file ITR-4 (Sugam). This form is designed for individuals with business or professional income taxed presumptively. If you don't use the presumptive scheme—perhaps because your expenses are higher than 50% or your income exceeds the threshold—you must file ITR-3. This form requires you to maintain books of account and report your actual profit and loss. Filing the wrong form can lead to a defective return notice from the tax department.
Understanding TDS and Form 26AS
When a company in India pays you for freelance work, they are often required to deduct Tax Deducted at Source (TDS) at a rate of 10% under Section 194J if your total payments from them exceed ₹30,000 in a year. This TDS is not a loss; it's a pre-paid tax on your behalf. You can see all the tax deducted against your PAN in your Form 26AS and Annual Information Statement (AIS) on the income tax portal. When you file your ITR, you claim this TDS amount as a credit against your final tax liability. If the TDS deducted is more than your total tax due, you will receive a refund.
Don't Forget Advance Tax
Unlike salaried income where TDS is deducted monthly, freelance income requires you to pay tax proactively. If your total tax liability for the year (after accounting for TDS) is expected to be more than ₹10,000, you must pay Advance Tax. This is paid in quarterly instalments on June 15, September 15, December 15, and March 15. However, there's a relief for those using the presumptive scheme (Section 44ADA): you can pay your entire advance tax in a single instalment by March 15. Missing these deadlines can attract interest penalties.
A Note on GST
While it’s a separate compliance, it's important to be aware of the Goods and Services Tax (GST). As a freelancer, you are required to register for GST if your annual turnover exceeds ₹20 lakh (or ₹10 lakh for special category states). Once registered, you must charge 18% GST on your invoices and file regular GST returns. However, providing interstate services does not automatically trigger mandatory registration if your turnover is below the ₹20 lakh threshold.
