How to save tax by turning your freelance expenses into deductions

Aditi was a graphic designer at a well-established advertising firm until recently. Her employer deducted taxes at source (TDS). While she didn't necessarily enjoy paying taxes, she didn't have to think much about them, either. Now, Aditi has turned to freelancing, but taxation has become a new ball game. While many of her clients still deduct TDS, she's now responsible for managing her taxes. She's realising that simply relying on TDS deductions might not be enough.

Like Aditi, many freelancers find themselves in a similar boat. They're now entrepreneurs responsible for managing every aspect of their business, including taxes. If you, like Aditi, are a freelancer wondering how to save tax, read on.

Let’s explore how freelancers can leverage business expenses to save tax.

Tax-saving strategies for freelancers in India
 

Understanding how to save tax can minimise your tax liability and maximise your earnings. Here are some income tax-saving options available for freelancers –

1. Opting for the Presumptive Tax Scheme

This scheme, under Section 44ADA of the Income Tax Act of 1961, simplifies the filing of tax returns. Freelancers in eligible professions can declare their income on a presumptive basis. Here, 50% of your gross receipts or turnover is taxable income. The remaining 50% is presumed to be expenses exempt from tax, even if the actual expenses are lower.

This is one of the many ways to reduce taxable income. This benefit applies only to gross receipts under ₹50 lakhs. The limit increases to ₹75 lakhs if the cash receipts are less than or equal to 5% of the receipts.

2. Claiming tax deductions under Chapter VI-A

To learn how to save tax, you must know the following deductions available under the Income Tax Act –

a. Section 80C – Deduction of up to ₹1.5 lakh is available for specified tax-saving investments. It includes Public Provident Fund (PPF), Equity Linked Savings Schemes (ELSS), life insurance policies, and more.

b. Section 80D – Premiums paid for health insurance for self, family, or dependent parents are eligible for deductions.

c. Section 80G – Donations to specified charitable organisations can be claimed for tax deductions.

d. Section 80E – Interest paid on education loans is deductible under this section.

e. Section 80GG – If you are paying rent but not receiving HRA, you can claim deductions here.

f. Section 80TTA – Tax-free savings account interest up to ₹10,000 is deductible.

g.  Section 80U – Individuals with disabilities can claim deductions per this provision.

By leveraging these sections, you can lower your income tax liability.

3. Claiming business expenses

Claiming legitimate business expenses is one of the most effective ways to save tax. Deducting costs incurred for running your freelance business can lower your taxable income. Let’s explore this in detail.

Key business expenses that can be claimed as deductions
 

One of the simplest ways to learn how to save tax is by understanding which business expenses qualify for deductions. As a freelancer, you incur various expenses to deliver your services. The Income Tax Act allows you to deduct many of these expenses, provided they are –

1. For the freelancing work being carried on
2. Spent exclusively for your work
3. Incurred during the tax year
4. Not a capital expenditure or a personal expenditure
5. Not incurred for any purpose which is an offence or is prohibited by law

The expenses listed below are your tax-saving options if they meet the previously mentioned requirements –

1. Office rent and utilities

If you rent office space or work from a co-working facility, your rent can be claimed as a business expense. Utility bills, such as electricity and water for work purposes, are also deductible.

If you work from home, you can apportion a percentage of these expenses based on the area used for business. For instance, if 20% of your home is used as your office, you can claim 20% of your rent and utility bills as a business expense.

2. Software and subscriptions

You may use tools like Adobe Creative Cloud, Microsoft Office, or project management software. The subscription fees for these tools are considered business expenses.

3. Business travel

Expenses such as flight tickets, hotel stays, and local transport incurred when travelling to meet clients or attend conferences are deductible.

4. Professional fees

Payments to accountants, legal advisors, or consultants for professional services are eligible for deduction.

5. Marketing and advertising costs

Expenses for running Google ads, social media promotions, or creating marketing materials are tax-deductible.

6. Telecommunication costs

If you use your phone or internet connection for work, you can claim a proportionate amount of the bills as a business expense.

7. Training and skill development

Enrolling in courses or attending workshops to enhance your skills is an investment in your business. The costs of such activities can also be deducted.

8. Depreciation on assets

If you purchase assets like a laptop, computer, printer, or other equipment used for your freelance work, you can claim depreciation on these assets as a business expense. The depreciation rate varies depending on the type of asset.

Tracking these expenses regularly can help you master how to save tax as a freelancer.

Maintaining proper records and documentation
 

Proper record-keeping will help you claim a deduction for expenses without any hassles during tax assessments.

Here are some practices to gain clarity on how to save tax while complying with tax regulations –

1. Maintain all invoices, receipts, and bills, ensuring they document the date, amount, and purpose of each business expense
2. Utilise accounting software or spreadsheets to effectively track income and expenses, enabling easy categorisation and report generation for tax purposes
3. Systematically organise all financial documents, whether physically or digitally, for effortless retrieval when needed

How to separate personal and business finances
 

Blurring the lines between personal and business finances can complicate tax filings. Here are some tips to maintain clarity –

1. Open a dedicated current account or credit card to track all income and expenses of your business
2. Pay yourself a consistent monthly salary from your business earnings to manage your personal finances
3. Always keep personal and business transactions separate to simplify expense tracking

Benefits of using a dedicated business account
 

A dedicated business account, like the IDFC FIRST Bank Current Account, can allow you to distinguish between your personal and business finances. It will simplify expense tracking, reconciliation, and tax calculations. Moreover, depending on your needs, you can choose from Platinum, Gold, and Silver Current Accounts. Each of these accounts provides access to the following business banking features –

1. Comprehensive digital banking – Access to an integrated Internet and mobile banking platform, allowing you to manage your finances seamlessly from anywhere.
2. Payment and collection solutions – A suite of payment and collection solutions to manage your cash flows, including POS, QR, and payment gateway facilities.
3. Beyond banking services – Offers over 100 additional services to support your professional needs, such as ERP, HRMS, payroll, taxation, legal, cloud services, and co-working spaces.
4. Minimum balance requirement – The account offers flexibility with competitive minimum balance requirements.
5. Zero transaction charges – You can benefit from zero charges on commonly used current account services like NEFT, RTGS, and IMPS transactions.

Moreover, The BRAVO auto sweep facility is available exclusively for Platinum customers, enabling funds exceeding a predetermined limit to be converted into fixed deposits, earning interest up to 7.25% per annum. The overdraft against FDs will allow the withdrawal of emergency funds without breaking FDs for liquidity during irregular income periods.

Conclusion
 

Learning how to save tax can help freelancers retain more of their hard-earned income. You can leverage your legitimate business expenses to reduce your tax liability.

Take the first step today by streamlining your finances with a dedicated business account. Open an IDFC FIRST Bank Current Account today to simplify your financial management and take control of your tax-saving journey.