Tax planning is essential for freelancers and digital working professionals in India, as it helps reduce the end-of-year burden. They can opt for the simplified presumptive taxation scheme (section 44ADA), in which 50% of their income is considered to be profit (if total credit is 70 LPA or higher), or the regular taxation schemes, which allow for deducting all business expenses.
If you are a freelancer, gig professional, or remote worker, it’s essential to plan tax payables earlier. Let’s understand the tax planning structures, the 5 D’s of tax planning, kinds of work included in freelancing, and much more.
What Kinds Of Work Are Included In Freelancing?
Freelancers are independent contractors, earning income on a per-job basis, without being tied as a full-time employee, which allows them to manage multiple projects at the same time for different clients.
Here are some of the common categories of work included in freelancing.
- Web Designing And Development
- Content Creation
- SESs And Digital Marketing
- Graphic and UX/UI designing
- Project Management
- Business Consulting
Digital Nomadism Meaning And Its Tax Liabilities
Digital nomad is a term that gained popularity in the 1990s that describes professionals who used to work virtually over the internet. The nature of work done by digital nomads, or remote workers, includes online services like site audit, software development, internet marketing, performance marketing, and many other domains.
They might work from their own house, rental space, cafe, or roam around the world while continuing their projects using a computer and the internet.
In this versatile circumstance, the digital nomad taxes liability, payables, and planning may differ based on their passport country, citizenship, and other factors. So, now let’s navigate through the GST, income tax liability, the law of freelancer tax in India, and income tax saving plans in detail to prepare yourself at the earliest.
Digital Nomadism Meaning And Its Tax Liabilities
Digital nomad is a term that gained popularity in the 1990s that describes professionals who used to work virtually over the internet. The nature of work done by digital nomads, or remote workers, includes online services like site audit, software development, internet marketing, performance marketing, and many other domains.
They might work from their own house, rental space, cafe, or roam around the world while continuing their projects using a computer and the internet.
In this versatile circumstance, the digital nomad taxes liability, payables, and planning may differ based on their passport country, citizenship, and other factors. So, now let’s navigate through the GST, income tax liability, the law of freelancer tax in India, and income tax saving plans in detail to prepare yourself at the earliest.
A Quick Overview Of Effective Tax Planning
Effective tax planning is a lawful and strategic process for managing and reducing the overall tax liability. It is an effective approach that helps to maximize the benefits of tax deductions and tax credits, which allows you to earn more money and allocate it to financial expenses.
Effective tax planning means complying with the provisions, tax deductions, and exemptions offered by the tax laws in India, such as 10% of TDS, 18% of GST, and more.
The following are the objectives of tax planning:-
- Minimize tax liability
- Wealth creation
- Ensures tax compliance
- Achieves financial goals.
What Are The 5 D's Of Tax Planning?
The 5 d’s of tax planning are the frameworks to remember the key strategies for minimizing the tax burden. These are commonly interpreted as: Dodge, Defer, Divide, Deduct, and Disguise.
1. Dodge
The legal practice of avoiding taxable income is referred to by this principle. It involves organising the money so that some sources of income are not initially regarded as taxable, frequently by utilising particular tax-exempt legal provisions.
2. Defer
Postponing the recognition of taxable income to a subsequent time, usually to a year when you expect to be in a lower tax bracket, is known as deferring income. With this tactic, you can keep your money for longer and possibly pay less in taxes overall.
3. Divide
In order to take advantage of lower tax brackets, this tactic involves legally dividing your income among family members. Wealth distribution can lower the total household tax bill because a nation’s tax system is frequently progressive, meaning higher incomes are taxed at a higher rate.
4. Deduct
The most common form of tax planning is deductions. The purpose of this principle is to reduce your overall tax bill by claiming all eligible costs and deductions. Your net taxable income will decrease and your tax bill will be smaller, the more deductions you have the right to take.
5. Disguise
In order to avoid or reduce their tax obligations, these schemes usually include complex structures where people receive income in ways that mask the true nature of payments. Loans or benefits from third parties in place of direct salary payments are notable examples.
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The Difference Between Tax Planning And Tax Avoidance
Here are the major differences between tax planning and tax avoidance.
GST Registration Threshold For Freelancers
In India, freelancers are usually required to register for GST if their total yearly income surpasses a specific threshold. This criterion is based on whether you sell goods or services and the state where you operate.
For independent contractors who offer services, the primary GST registration threshold is:
- ₹20 lakh for the majority of states.
- The sum is ₹10 lakh for states in the special category.
What Are The Unique Tax Considerations For Digital Work Professionals?
The residential status and place of employment have a significant impact on the tax liability of digital work professionals.
Residential Status
If a freelancer is a tax resident in India, their residential status—which is often established by spending 182 days or more in India during a fiscal year—determines the amount of tax they must pay on their global earnings.
Foreign Assets
When filing an income tax return for freelancers, as an Indian citizen, you are required to report all foreign assets and accounts you have under Schedule FA of your tax returns.
Foreign Tax Credit (FTC)
If a digital worker is an Indian tax resident who has paid taxes on their income overseas, they are eligible to get an FTC under the Double Taxation Avoidance Agreement (DTAA). They must file Form 67 before filing their ITR.
Read Also: Old Tax Regime vs New Tax Regime – Which One Saves You More?
What Is The Best Tax Planning For Freelancers In India?
Early tax planning helps you analyze the payables, claim credits, and manage TDS, GST, and other deductions. Here is the three-step planning to ease tax liability for individual contractors, freelancers, and digital professionals.
- Choosing The Right Taxation Schemes:- Presumptive Taxation Scheme (Section 44ADA) is the best saving scheme for freelancers whose gross credits are up to ₹50 lakhs per annum.
- Minimize Deductions:- You can claim a variety of deductions to lower tax liability, regardless of the taxation plan you select.
- Fulfilling the GST Obligations:- If your estimated tax liability exceeds ₹10,000, and turnover exceeds the ₹20 lakh threshold, it is required to pay taxes quarterly.
Conclusion- Navigating Tax Complexities For Freelancers And Digital Nomads In India
For international freelancers, understanding strategies and objectives of tax planning is essential to balance between profitability and regulation. Freelancers and remote working professionals can reduce liabilities and ensure long-term financial stability by utilising DTAAs, maximising deductions, and staying updated on tax regulations. Proactive tax planning and management will continue to be essential to a prosperous freelance career as cross-border work expands.
FAQs- A Quick Guide To Tax Queries About Freelancers And Digital Nomads
Freelancers tax their total income after approved expenses have been deducted, following the slab rates established in their country’s Income Tax Act.
TDS, tax deducted at source, is a system whereby consumers subtract a proportion of their payment before settling the freelancer and deposit it with the government.
Yes, digital nomads can claim legitimate business expenses like travel, equipment, and internet costs to reduce their taxable income.
Tax debt might be decreased by means of deductions under paragraphs like 80C, tax-saving instrument investments, correct expense records, and prompt filing.
Yes, freelance income below the basic exemption limit set by the tax authority (e.g., ₹2.5 lakh in India) is generally not taxable.
If they meet the requirements for tax residence under Indian tax regulations, Indian digital nomads will have to pay taxes on their worldwide income in India.
Revenue from foreign customers is taxable in the nation of residence; double taxation prevention treaties may be used to avoid being taxed twice.
