Reddit/LI: Simple explanation of Salary Tax vs Freelance tax
How is freelance income taxed differently compared to salary income
Freelancers using Section 44ADA don't have to show expense bills in most cases, but salaried income doesn't get that treatment.
Let us compare and understand how different they are.
How the Income Tax Act Classifies types of Income
The Income Tax Act divides income into five heads:
- Income from Salary
- Income from Business or Profession
- Income from House Property
- Income from Capital Gains
- Income from Other Sources
Every rupee earned in a financial year must fall under one or more of these heads. (They are renaming the sections next year)
All income is reported in one single Income Tax Return. You cannot file multiple returns for one financial year.
What counts as salary income & freelance income
Salary income exists when there is an employer-employee relationship. This requires an employment contract with an Indian company, TDS deduction under section 192 and deductions under labor laws. If these exist, income falls under Income from Salary.
Remote workers for foreign companies do not have an employer-employee relationship. They provide services, raise invoices (sometimes you get paid without any invoices as well) and get paid for work. This income falls under Income from Business or Profession. There is no employment contract, no deduction of TDS under Section 192 and no deductions under labor laws.
Salary benefits do not apply to freelancers
Once income falls under Business or Profession, salary benefits stop.
Freelancers do not get:
- Standard deduction of Rs. 75000 under new regime
- House Rent Allowance Deductions (old regime)
- Employer-provided car tax benefits (both old and new regime)
- Food allowance (old regime)
- Travel allowance (old regime)
- Leave Travel Allowance (old regime)
- Employer contribution to NPS under Section 80CCD(2) (both old and new regime)
Also, EPF benefits work only through the employer payroll. For freelancers, the EPF contribution route does not exist.
Common way of taxing freelance income (Section 44ADA)
IT freelancers earning less than 75LPA should use Section 44ADA to file their taxes.
Section 44ADA is a simple taxation scheme.
Under this section:
- 50% of gross receipts is treated as taxable profit
- The remaining 50% is assumed as expenses (you cannot manually claim any expenses)
- Detailed records are not required
- Expense proof is not required
Gross Receipts vs. Salary Amount
This is a common area of confusion. Here's a quick comparison:
------------------------ --------------------------------------------------------------------------- --------------------------------------------------------------------------------------------------------------------------- Aspect Salary Income Freelance Income (Under Section 44ADA)
What is taxable Income Taxed on the amount received less applicable deductions. 50% gross receipts (total amount received, including monthly/hourly payments, bonuses and reimbursements)
What It Represents Actual personal or work-related expenses are not allowable as deductions. No separate deduction for expenses (personal or business), as expenses are presumed and built into the 50% deemed income. ------------------------ --------------------------------------------------------------------------- ---------------------------------------------------------------------------------------------------------------------------
Expenses do not reduce gross receipts
The law also sets limits on who can use this method.
You cannot subtract:
- Laptop cost
- Internet bills
- Rent
- Electricity
- Platform fees like Fiverr or Upwork fees
The law already deducts expenses through the 50% rule.
Section 44ADA limits and classification risk
Section 44ADA has receipt limits. Always say that the limit is normally 75lakhs. But it is 50 lakhs if you receive more than 5% of your revenue through non banking channels (shares, crypto etc)
You can save taxes if your profits are less than 50% of revenue. But, you will be required to maintain proper records of Incomes and expenses and will be required to get these records audited by a CA. These cost additional effort and money.
Exchange rate rule for foreign income
If the bank converts foreign currency and credits INR before filing the return:
- The INR credited by the bank is income. RBI or Google rates do not apply.
If foreign income is not received in India before filing the return:
- Rule 115 of the Income Tax Rules applies
- income must be converted using the Telegraphic Transfer Buying Rate
- the SBI TT Buying Rate is used as the standard reference
Using any other rate is incorrect.
How tax payment works
For salaried employees, tax is deducted every month by the employer through TDS. Freelancers do not have this system. Foreign clients do not deduct Indian TDS.
Freelancers must pay tax themselves using advance tax. Under presumptive taxation, the entire tax liability must be paid by 15th March. Delays attract 1% interest on unpaid tax.
GST and remote work
Earning Salary income does not require you to follow GST law.
Services provided by an employee to an employer are not covered under GST law.
Freelance services fall under GST.
GST registration is required when service turnover crosses:
- Rs. 20 lakh in most states
- Rs. 10 lakh in special category states
Services provided to foreign clients qualify as export of services. There are a few simple rules you have to follow
Under GST law, export of services are given zero- rating benefits. In simple terms:
- You can supply your services to foreign clients without charging GST
- You can get refund of GST you pay on your business purchases