How to split freelance project income with a friend and pay tax only on my share?

Hi,

I received payment from a client for a freelance project. I want to send 50% of that amount to my friend who worked with me on this project.

I want to be liable to pay tax only on my 50%, and he should pay tax on the amount he receives (plus his total annual income).

What is the correct process to do this smoothly?

Should we make an agreement?
Should I give him a contract and he sends me an invoice?
Can I show the amount I send him as a business expense?

What is the exact process I should follow to stay compliant?

Replies (3)
Quick Summary
Treat friend as contractor. Record full income, take his share as expense via invoice. Deduct TDS if applicable, pay net amount. He reports his income separately. This ensures tax only on your share.

To pay tax only on your share, treat your friend as a consultant. Have him issue you an invoice for 50%, pay him via bank transfer, and claim that payment as a business expense in your ITR. This reduces your "Net Taxable Income" to just your 50% share.

  1. You enter into a written agreement with your friend stating:

    • He is an independent contractor

    • Scope of work

    • Revenue-sharing or fixed consideration terms

  2. He raises an invoice to you for his share (₹5 lakhs).

  3. You pay him against that invoice.

  4. You record:

    • ₹10 lakhs as gross receipts

    • ₹5 lakhs as professional expense (subcontract charges)

  5. He declares ₹5 lakhs as his professional income.

✔ This is legally clean and commercially defendable.

If the payment exceeds ₹30,000 (which it does), then:

  • Section 194J (professional fees) may apply.

  • You may need to deduct TDS @ 10% before paying him.

  • Deposit TDS and issue Form 16A.

Failure to deduct TDS may result in:

  • Disallowance under Section 40(a)(ia)

  • Interest and penalty exposure

Hi Sandhya, Thanks a lot for this, 

Should I make him send an invoice of 5 lakhs or 4.5 lakhs (deducting the 10% TDS) ?

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