Freelancing income will be taxable under the head "Profits and Gains" of Business and Profession.
Freelancers can deduct expenses they incurred to do the job from their income. This could be anything from office furniture to cab fares to visit clients. These expenses must be directly related to the job you are doing.
How should freelancers account for their income? When it is due or when it is actually received?
There are two types of accounting methods:
- Accrual Basis of Accounting (Mercantile Basis)
- Income is accounted or booked when the right to receive arises
- Expenses are accounted or booked when the obligation to pay arises
- Tax liability arises when income is booked – tax may become payable when income may not have been received
- This approach can be followed for all heads of income, compulsorily for heads such as salary, house property, and capital gains.
- Cash Basis of Accounting
- Income is booked when it is actually received
- Expenses are booked when they are actually paid
- Tax liability arises in the year income is received – so it makes you pay tax only when income is in your hands.
- The approach is allowed only for profits and losses from business/profession and income from other sources.