Dear Fruit Jam,
He is required to maintain the books of accounts as his gross receipts are more than 1,50,000/-.
Regarding the deduction of expenses, go through the following.
The simple rule for determining whether an expense is deductible from your income is – expenses which are directly relatable to your business are allowed to be deducted. The Act has also laid out some expenses which have been specifically allowed to be deducted.
In general if you satisfy these conditions regarding your expenses, you can deduct them from your income-
- The expense is for the freelancing work being carried on
- It has been spent fully & exclusively for the purpose of your work
- It is incurred during the tax year
- It is not a capital expenditure or a personal expenditure of the freelancer
- It is not incurred for any purpose which is an offence or is prohibited by law
Therefore the following expenses when they satisfy the conditions laid out above will be allowed to be deducted from your income –
- Rent – If you take a property on rent for carrying on your work, rent paid by you is allowed to be deducted.
- Repairs – If you have agreed to pay for repairs to the rented property then these repair costs can be deducted. If you own the business property and carry out repairs those are also allowed to be deducted. Any repairs to your laptop, printer, equipment are also allowed to be deducted.
- Local taxes and Insurance for your own business property
- Depreciation – When you purchase an asset which is a Capital Asset, the benefit of such an asset is usually expected to last more than a year, such assets are capitalized and not charged to expenses when they are bought. Every year a small portion of its cost is expensed and is allowed to be reduced from your income. This expense which is charged every year is called Depreciation. For example, when you buy a laptop for Rs 60,000 to carry on your freelancing work – the Rs 60,000 will be considered your asset and assuming a straight line depreciation of 33.33% each year (depreciation % and methods are laid out in the Act for different type of assets, hypothetical rate here for ease of understanding), every year Rs 20,000 shall be charged as expenses. And in 3 years we would consider the asset to be fully depreciated. Note that, the type of assets, methods of depreciation and rates of depreciation to be charged as per the Income Tax Act are laid down by the Act itself and those shall be applied.
- Office expenses – Expenses incurred to carry on your work such as printer supplies, your monthly telephone bills, internet bills or conveyance expenses – when you go to meet clients.
- Expenses of Domain registration, apps purchased to test your product; those are also allowed as expenses.
- Travelling expenses – when you do a travel to meet your client could be within or outside of India (of course, assuming this is not paid for by your client).
- Meal, entertainment or hospitality expenses – when you do client meetings, when you take your clients out for dinner or some other outing and money has been solely spent with the intention of getting new business or retaining existing business.
Personal Expenses – Note that when any expenses are incurred or asset (on which depreciation is being claimed) is used partly for professional purposes and partly personal purposes, a reasonable portion of the expenses or depreciation is allowed as deduction (and not allowed fully). For example, in case of your monthly mobile bills, some of your calls may be personal while others may be professional, only a reasonable portion of your mobile bill attributable to your freelance work shall be allowed to be deducted.
Are some expenses expressly disallowed to be deducted from your Income?
Some expenses are expressly disallowed as per the Income Tax Act – you cannot deduct these from your Income.
- Income Tax paid by you is not allowed to be deducted from Income
- Also any interest or penalty or fine for non-payment or late payment of income tax is not deductible as a business expense
- Cash Expenses – If you pay for an expense which is more than Rs 20,000 – in cash, such expense will not be allowed to be deducted. You need to make payments for all your expenses in excess of Rs 20,000 either by an account payee cheque or a demand draft. Of course, you are allowed to make payments in excess of Rs 20,000 through banking systems or online transfers, credit cards or debit cards.
CAclubindia
