Under income tax law, freelancers are considered self-employed. Hence, income earned by freelancers is taxable under the head “Profits & Gains from Business or Profession”.
If you look closely, income tax law imposes a tax on profits and not income. Thus, out of income earned in a year, freelancers (and all self-employed persons) can deduct business expenses to calculate the profits and pay tax on such profits.
As a freelancer, the expenses you incur are likely to fall in one of the three categories – Capital, Business or Personal.
Can I deduct personal expenses?
You cannot deduct personal expenses. If some expenses are incurred for partly home and partly business purpose, such as mobile, internet or rent (if you are using the home as an office as well), you can deduct the proportionate amount as business expenses.
You should have reasonable documents to support the calculation of proportionate amount.
Are capital assets such as furniture, equipment etc. deductible?
Capital assets bought for the business are not deductible from income. However, you can deduct the depreciation on such assets from income. Income tax law has defined depreciation rates on every asset, which should be used for calculating the depreciation amount.
Again, if the assets are used partly for personal and business purpose, depreciation will be deductible proportionately. You should preserve the invoices and receipts of all the assets purchased in a year atleast for next 6 years.
How can I claim business expenses?
Usually, all the expenses incurred for business purposes are deductible from income. Following are the usual expenses incurred by the freelancers -
Rent Expenses
If you are paying rent for an office, you can deduct the rent amount from income. If you are working from home, you can still pay rent to the owner (even if they are your parents) and claim rent paid as a business expense. However, it is admissible only if your parents show rent income while filing their income tax returns. Also, you can’t pay higher than what is generally payable as office rent.
Travel Expenses
Expenses incurred for travelling to meet clients within or outside India are deductible from income. It includes expenses related to travel, lodging, meals and other meeting expenses, as long as they are spent for business.
Subscription Expenses
Any subscription to a trade activity or journal associated with business is usually deductible. For example, a tax writer has subscribed to a tax journal to stay abreast of latest news and amendments. He can deduct this expense against his income.
Any subscription related to the domain name, hosting and offline or online training or development is also deductible.
Software Expenses
Freelancers might rely on certain software to perform their daily tasks. For example, a writer would need access to content management tools while a marketing consultant would require data visualization platforms to prepare a banner or infographic. They can deduct these expenses against their income.
Office Expenses
Expenses incurred in offices like telephone and internet, electricity, housekeeping, security, or salary paid to any employee are also deductible from income.
Payment to other freelancers or consultants
If you are opting for any services from other freelancers or marketing consultants or professionals, you can claim the fees or commission paid to them as business expenses.
Expenses incurred for hiring an accountant or tax consultant are also covered under these costs.
If you are not well versed with the tax implications, you should rather discuss it with a tax advisor because it’s worth the money spent. Reach us and we’ll make tax easy for you.
The author can also be reached at support@baywiser.com
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