Taxation of Freelancers and Small Business Owners- Part 1

In India, freelancers and owners of small businesses have a different system of taxation as compared to those on salaries. Many salaried employees have taxes deducted right from the source, but these workers and owners themselves pay for their taxes. They are expected to do some planning: understand the basic tax framework, deductions available, compliance requirements, and penalties to avoid. So, let's begin with how the process of taxation goes for freelancers and small business owners in India, along with how they can reduce their liability to pay a minimum tax by availing certain deductions.

Basically, through the Income Tax Act and Rules, the income of freelancers and professionals is booked under the heads "Profits and Gains from Business or Profession." This is in addition to the fact that such business revenues are considered different from regular salary-earning individuals categorized under the "Salary" heads. Since freelancers are not covered under any class of salary, they maintain proper books of accounts determining legally their taxable income. These freelancers can be professionals like writers, designers, consultants, photographers, or web developers, and small business owners can also be into any other kind of ventures like retail, services, or manufacturing. Whatever they earn locally or abroad is to be brought under business income and tax computed accordingly.

One of the big advantages of being assessed to tax under the head of business or profession is that freelancers and business owners can claim deductions on expenses incurred in generating their income, which goes a long way in reducing their overall tax liability. Let us now look at some of the key deductions they can avail themselves of.

Another huge write-off for a freelancer and small business person is an office expense. Thus, in case you rented or bought an office used regularly while working either in your own business or providing freelance services, you would be allowed to subtract expenses related to an office: the rent, utility bills, and so on. Or, if your business is operating from home, then you may get a write-off for part of your house expenses as part of the business expenses, too.

Other expenses freelancers incur are on travel and communication. These include the costs of travel tickets, stay during business trips, mobile bills, internet charges, and even the fuel for business-related travel. Provided such expenses are directly related to your work, they are fully deductible from your taxable income.

The other major deduction is the depreciation of assets. If you acquire capital assets like laptops, cameras, or even furniture for your business, then you can claim the same as depreciation. The beauty of depreciation is that the cost of these capital assets is spread out across their useful life. This means that if you purchased a laptop for ₹ 50,000, you may be able to claim only that portion every year as depreciation that applies for reducing your taxable income for that year.

Then, there are marketing and advertising costs. Whether you are advertising online, through print, social media campaigns, or even brochures and business cards, all this is deductible. You can deduct professional fees you pay to a professional, such as accountants, lawyers, and consultants, when these individuals render services to your business operations.

Lastly, any expenses that relate to the repair and maintenance of office equipment or machinery used for business purposes are deductible. It is highly advisable to keep all these expenses in detail, such as receipts and invoices, to justify your claims when filing your income tax return.

Conclusion

A freelancer and small business owner in India get several opportunities to subtract business-related expenses in order to show low taxable income. Therefore, if managed well, those expenses will bring in proper paperwork to minimize tax liabilities and enable more of the hard-earned money to be kept to oneself. The key to staying compliant and optimizing your tax strategy is to understand the deductions available to you.

In the next chapter, we’ll dive into Part 2, exploring a range of additional Taxation of Freelancers and Small Business Owners