Tax Rules for Freelancers in FY 2025-26: ITR Filing, TDS and GST Compliance

After conducting an in-depth analysis of the GST applicability on freelancers, it is equally important to understand the Income Tax implications applicable to such professionals. In India, freelancing income is treated as "Profits and Gains of Business or Profession" under Section 28 of the Income-tax Act, 1961.

Accordingly, freelancers can avail benefits available to businesses, such as claiming expenses, depreciation, and in some cases, presumptive taxation under Sections 44AD or 44ADA, subject to conditions.

If you wish to study the GST framework for freelancers in detail, you may click on my name below to access all related articles where I have explained the GST provisions comprehensively.

This article explains:

• The correct classification of income,
• Common ITR filing mistakes by freelancers,
• Available tax-saving schemes and deductions,
• The difference between old vs. new tax regimes, and
• Conditions for applicability of presumptive schemes under Sections 44AD and 44ADA.

I. Nature of Freelance Income - Treated as Business Income

Freelancers are treated as self-employed professionals. Their earnings are classified under Profits and Gains of Business or Profession, attracting the following implications:

• They can claim actual business-related expenses while filing ITR.
• Eligible expenses include rent, internet, electricity, software subscriptions, etc.
• Income is taxable either under normal provisions (ITR-3) or presumptive taxation schemes (ITR-4) subject to eligibility under Section 44AD or 44ADA.

II. Income Tax Slabs - Old vs. New Regime

A. Old Tax Regime (For Individuals below 60 years)

• Rebate under Section 87A: If total income ≤ Rs 5,00,000, then rebate of Rs 12,500 or actual tax liability (whichever is lower) is available → Net tax payable = Nil

Note: Separate slab for senior citizens exists under the old regime.

B. New Tax Regime (Effective from FY 2025-26)

• Standard Deduction: Rs 75,000 for salaried and pensioners
• Section 87A Rebate: Rs 60,000 → Ensures zero tax up to Rs 12 lakh taxable income (if eligible)

Common For both Regime

Cess: 4% Health & Education Cess is applicable.

• Surcharge:
• 10% if income exceeds Rs 50 lakh
• 15% if income exceeds Rs 1 crore
• 25% if income exceeds Rs 2 crore
• 37% if income exceeds Rs 5 crore

III. Allowable Deductions and Depreciation (Under Normal Scheme - ITR-3)

Freelancers who opt out of presumptive taxation can claim the following:

• Actual Business Expenses:
• Internet, electricity, rent, phone bills
• Software subscriptions, co-working space charges
• Bank charges, domain and hosting services
• Depreciation on Business Assets:
• Laptop, printer, mobile phone, office equipment
• Chapter VI-A Deductions (Only under Old Regime):
• Section 80C: Rs 1.5 lakh (LIC, PPF, ELSS, etc.)
• Section 80D: Health insurance premium
• Section 80E: Interest on education loan
• Section 80G: Donations to approved charities

Note: Chapter VI-A deductions are not allowed under the New Regime.

IV. GST Obligations for Freelancers

• Mandatory GST Registration:
• If aggregate turnover exceeds Rs 20 lakh (Rs 10 lakh for North-Eastern & Hill states)
• Export of Services (e.g., to foreign clients):
• Treated as zero-rated supply
• No GST payable if LUT (Letter of Undertaking) is filed
• Input tax credit (ITC) can be claimed
• GST returns like GSTR-1 and GSTR-3B must be filed

V. Conversion of Foreign Receipts - Rule 115 of the Income Tax Rules, 1962

• Rule 115 mandates that income earned in foreign currency must be converted to INR using the telegraphic transfer buying rate (TTBR) of SBI (or any notified bank) on the date of receipt or accrual.
• The correct rate selection is crucial as it directly affects taxable income. Due diligence is necessary before finalizing the exchange rate.

VI. TDS Deduction and Refund - Importance of Timely ITR Filing

• Freelancers often receive income after TDS deduction under Sections 194J, 194C, 194H, 195, etc.
• TDS credits must be matched with Form 26AS and claimed in the correct Assessment Year.
• Delays in filing returns may result in:
• Loss of TDS credit
• Penalty under Section 234F
• Loss of interest on refund

VII. Common Mistake - Misuse of Sections 44AD & 44ADA

Many freelancers wrongly opt for presumptive taxation under Sections 44AD or 44ADA without verifying eligibility, leading to wrong ITR forms, tax underreporting, and potential notices from the CPC/Assessing Officer.

A. Section 44ADA - Presumptive Taxation for Specified Professionals

• Eligible Persons:
• Resident individuals, HUFs, and partnership firms (excluding LLPs)
• Eligible Professions: Only those specified under Section 44AA(1):
• Legal (Lawyers)
• Medical (Doctors)
• Engineering/Architecture
• Accountancy
• Technical Consultancy
• Interior Decoration
• Film Artists (as per CBDT)
• Other CBDT-notified professions
• Ineligible: Freelancers engaged in:
• Content writing, digital marketing, social media management, business consultancy (unless covered)
• LLPs or Companies
• Turnover Limit: Extended to Rs 75 lakh if 95% receipts are via banking/digital mode (as amended by Finance Act, 2023)

Misconception: Holding a degree or providing consulting does not automatically qualify for 44ADA.

B. Section 44AD - Presumptive Scheme for Business Income

• Eligible Assessee:
• Resident Individual, HUF, or Partnership Firm (not LLP)
• Ineligible Assessee:
• Companies, LLPs, professionals notified under 44AA(1)
• Ineligible Business:
• Commission, brokerage, or agency
• Plying, hiring or leasing goods carriages (covered under 44AE)
• Turnover Limit:
• Rs 2 crore (Extended to Rs 3 crore if 95% receipts are via banking/digital mode)
• Deemed Income:
• 8% of gross receipts (cash or cheque)
• 6% of gross receipts (digital mode)

VIII. Conclusion: Key Takeaways and Compliance Advisory

Freelancers form a distinct category of taxpayers who must carefully select their filing regime, claim eligible expenses, and evaluate their business model before opting for any presumptive tax scheme. Incorrect selection of Section 44AD/44ADA, wrong exchange rate under Rule 115, or failure to reconcile TDS from 26AS often results in defective return processing, scrutiny, or demand notices.

• Ensure the correct ITR Form is used (ITR-3 or ITR-4 as applicable)
• Do not misuse presumptive taxation without verifying eligibility
• Choose between the Old and New Regime based on comparative benefit
• File return within the due date to claim TDS and avoid penalties
• Comply with GST registration and LUT requirements for export services
• Consult a professional before filing, especially for foreign income

The author can also be reached at varunmukeshgupta96@gmail.com