The daily routine of office work may not be everyone’s cup of tea. Some people like the flexibility and independence of working from anywhere, so they can pursue their other interests, or they just like to avoid a tedious routine. Freelancing suits them, and they can work from the comfort of their home, a coffee shop, a scenic location out of town, or a coworking space. Sectors affected by the Covid pandemic have led to an increase in the number of self-employed professionals over the past two years. Those new to this working method should remember that the tax rules will also apply to them. In addition, along with changes in the periodicity or amount of income, the applicable taxation rules may also be different from the previous rules. Here are some points to consider.
Expenses to deduct
Self-employed persons may deduct from their income the expenses they incur in the performance of their duties. This includes the purchase of office furniture, taxi fares, client visits, etc. These expenses are usually directly related to the work they perform. However, conditions apply for claiming these expenses as a deduction. “First, the expense must be for the self-employment performed. Second, the expense must be wholly and exclusively for the purpose of your work.
Third, it should have been incurred in the tax year. Fourth, it should not be a capital expense or personal expense of the freelancer. Fifth, the expense should not have been incurred for a purpose that constitutes an offense 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 do your job such as the purchase of a printer, office supplies, monthly phone bills, internet bills and transportation costs can be deducted.
Trip costs: The cost of travel to meet your clients inside or outside India is allowed as a deduction.
Rent paid for the property: If you hire property for the performance of your work, the rent paid may be deducted from income as an expense.
Repairs carried out: If you have agreed to pay for the repairs to the rented property or if you own the property, the repair costs may also be deducted. Any repairs to your laptop, printer and other equipment can also be deducted.
Meals, entertainment or hospitality expenses: These can be claimed if you hold client meetings, take your clients out for a meal or other outings and the money was spent solely with the intention of obtaining new business or retaining existing business.
Other expenses: “Local taxes and insurance for your own commercial property and domain registration and apps purchased to test your product are also allowed as expenses,” adds Gupta.
Depreciation: When you buy a fixed asset, it is generally expected that the benefit of such an asset will last for more than a year. These assets are capitalized and not expensed when purchased. Each year, a small portion of its cost is spent and can be deducted from your income. This expense charge each year is called depreciation.
“For example, when you buy a laptop for, say, Rs 60,000 to do your freelance work, then Rs 60,000 will be considered your asset. Assuming a linear depreciation of 33.33% each year, Rs 20,000 will be charged as annual expenses. Over the next three years, we would consider the asset to be fully depreciated. Note that the type of assets, depreciation methods and depreciation rates to be applied are defined by the income tax law and these will apply,” says Gupta.