Daily routine of office work may not be everyone’s cup of tea. Some people like the flexibility and independence to working from anywhere, so that they can pursue their other interests, or they simply like to avoid a tedious routine. Freelance work suits them and they can work from the comfort of their home, a café, a scenic out-of-the-city location, or a coworking space. The Covid pandemic-hit sectors have led to an increase in the number of freelance professionals in the past two years. Those who are new to this method of working must remember that tax rules will apply to them as well. Moreover, along with the changes in the periodicity or quantum of income, the applicable taxation rules may also be different from earlier. Here are a few points to consider.
Expenses For Deduction
Freelance workers can deduct the expenses they incur in performing their duties, from their income. This includes purchase of office furniture, cab fares, client visits, and more. These expenses are usually directly linked to the job they are performing. However, conditions apply to claiming such expenses as a deduction. “First, the expense has to be for the freelance work being carried on. Second, the expense should be fully and exclusively for the purpose of your work.
Third, it should have been incurred during the tax year. Fourth, it should not be a capital expenditure or a personal expenditure of the freelancer. Fifth, the expense should not have been incurred for any purpose that is an offence or is prohibited by law,” says Archit Gupta, founder and CEO of tax portal ClearTax.
Apart from these, other expenses can also be claimed for deduction.
Office Expenses: Expenses incurred to carry out your work such as purchasing a printer, office supplies, monthly telephone bills, internet bills and conveyance expenses can be claimed as a deduction.
Travel Expenses: The cost of travel to meet your clients within or outside of India is allowed as a deduction.
Rent Paid For Property: If you take a property on rent for carrying out your work, the rent paid can be deducted from the income as an expense.
Repairs Undertaken: If you have agreed to pay for repairs to the rented property or if you own the property, then too the repair expenses can be deducted. Any repairs to your laptop, printer and other equipment are also allowed to be deducted.
Meals, Entertainment Or Hospitality Expenses: These can be claimed if you conduct client meetings, take your clients out for a meal or other outings and money has been solely spent with the intention of getting new business or retaining existing business.
Other Expenses: “Local taxes and insurance for your own business property and domain registration and apps purchased to test your product are also allowed as expenses,” adds Gupta.
Depreciation: When you purchase a capital asset, the benefit of such an asset is usually expected to last more than a year. Such assets are capitalised 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 charge every year is called depreciation.
“For instance, when you buy a laptop for, say, Rs 60,000 to do your freelance work, then Rs 60,000 will be considered as your asset. Assuming a straight line depreciation of 33.33 per cent each year, Rs 20,000 shall be charged as expenses yearly. In the next three 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 are laid down by the income-tax Act and those will apply,” explains Gupta.
