Understanding income tax implications for professionals freelancers

If the employer allows to either become a consultant or a freelancer , this has just become more attractive since one of the biggest reliefs which was introduced in budget 2016 was for the people who are earning up to Rs 50 lakh from a business. The finance minister had brought these professionals under the ambit of presumptive tax and now they were required to declare the profit and then pay taxes at a pre-determined rate of 50% of the gross receipts. The presumptive Tax benefits were earlier available exclusively to the individual businesses, HUF and those partnership firms which had a turnover of less than 1 crore under the section 44AD of the IT act. The net income arose out of it was thus estimated to be 8% gross receipts.
The professionals were required to maintain a record of all the work-related expenses which were incurred for up to eight years after filing of the returns. Moreover, those who had an annual income of Rs 10 lakh or more were required to get their expenses duly audited.
The article below however will help us to understand the tax implications for the professionals and freelancers .

In order to rationalize the presumptive taxation scheme and also to reduce the compliance burden of the small tax payers which were having income from profession and also in order to facilitate the ease of doing business, it is proposed to provide for the presumptive taxation regime for the professionals.

In this regard, new section 44ADA was however proposed to be inserted in the Act in order to provide for estimating the income of an assessee who is engaged in any profession which is referred to in sub-section (1) of section 44AA such as legal, medical, engineering or the architectural profession or the profession of accountancy or the technical consultancy or an interior decoration or any other kind of profession as is notified by the Board in the Official Gazette and also whose total gross receipts does not exceed Rs 50 lakh in a previous year, at a sum which is equal to fifty per cent of the total gross receipts, or, as the case may be , a sum which is higher than the aforesaid sum which is earned by the assessee.
The scheme would thus apply to such resident assessee who is an individual, Hindu undivided family or a partnership firm but not a Limited Liability partnership firm. Under the scheme, the assessee would be deemed to have been allowed the deductions under section 30 to 38.

Accordingly, the written down value of any asset which is used for the purpose of the profession of the assessee would be deemed to have been calculated as if the assessee had claimed and had actually been allowed the deduction in respect of the depreciation for the relevant assessment years.

It is thus also proposed that the assessee would not be required to maintain books of account under sub-section (1) of section 44AA and then get the accounts audited under section 44AB in respect of such kind of income unless the assessee claims that the profits and the gains from the aforesaid profession are lower than the profits and the gains deemed to be his income under sub-section (1) of section 44ADA and also his income exceeds the maximum amount which is thus not chargeable to income-tax.

The real benefit of being however a consultant or a freelancer kicks in with the deductible expenses. So, if the deductibles are more than 50% of the income or they are running at a loss resulting in a negative income, then one should have the profit and loss statements in place.

This article has been contributed by Simmi Setia, Content Writer at LegalRaasta, an online portal for GST software, GST Return Filing, gst registration, section 8 company registration, nidhi company registration, IEC registration, fssai license.