With the growing penetration of Internet and popularity of online markets — more and more people are turning towards internet-based businesses and professions. Some of these people are choosing blogging and freelancing as full-time jobs while there are many others who become blogger or freelancer to earn some extra bucks. As a self employed person bloggers and freelancers enjoy the freedom to take their own decisions. But, this freedom of working from home and making your own decision also forces you to do certain things that salaried people don't need to worry about. Calculating income tax for bloggers and freelancers is one of such things. Bloggers are not lucky enough to sit in peace while an automated system calculates and takes away a part of our income as TDS (Tax Deducted at Source).
If you are earning or planning to earn through your blog or by freelancing, you must get acquainted with the basic accounting rules and the current income tax rules that affect bloggers and freelancer. We don't expect you to be a pro but you need to get some essential knowledge because a tax liability is simultaneously generated whenever and wherever an income generates. Whoever is earning becomes liable to income tax regardless of their gender or age. This article will help you understand the income tax rules for bloggers.
How Bloggers / Freelancers Calculate Taxable Income for Income Tax Purpose
Step 1. Calculate your total revenue earned
In India, financial year starts from 01 April and ends on 31 March. So, for income tax purpose, you need to calculate the overall income you've earned between 01 April to 31 March.
Total revenue calculation is done after the financial years ends (i.e. after 31 March). You need to pay your income tax before 31 July — so you need to do all the tax calculations some time between 01 April and 31 July.
To begin with you need to calculate the total revenue you've earned from blogging or freelancing. Let's see this with the examples of Mr. B (a blogger) and Miss. F (a freelancer)
Total Revenue of Blogger (Mr. B)
- Income from Google AdSense: Rs. 4,00,000
- Income from affiliate programs: Rs. 50,000
- Income from sponsored reviews: Rs. 1,25,000
- Income from guest blogging: Rs. 25,000
- Income from interest from bank: Rs. 10,000
- Total income: Rs. 6,10,000
Total Revenue of a Freelancer (Ms. F)
- Amount received from client 1: Rs. 3,30,000
- Amount received from client 2: Rs. 1,70,000
- Income from mentoring website: Rs. 10,000
- Income from interest from bank: Rs. 25,000
- Total income: Rs. 5,35,000
Please note that the above calculations are just for the purpose of demonstration. You should add up income from all the income sources that you may have.
Step 2. Calculate your expenses
As a full-time blogger/freelancer, you are considered to be running a business. Businesses earn revenue but they also have certain expenses. You need to pay income tax only on the net profit your have made in previous financial year. In order to calculate profit, you would need to calculate total expenses that you incurred in earning your revenue.
Total expenses for a Blogger (Mr. B)
- Internet connection expenses: Rs. 12,000
- Domain charges: Rs. 1,000
- Hosting charges: Rs. 7,000
- Advertising expenses: Rs. 10,000
- Payment to professionals/ freelancers: Rs. 30,000
- Depreciation on office equipment and furniture: Rs. 8,000
- Total Expenses: Rs. 68,000
Total expenses for a freelancer (Ms. F)
- Internet related expenses: Rs. 12,000
- Membership fee of freelancing websites: Rs. 5,000
- Depreciation on office equipment and furniture: Rs. 6,000
- Travel for a conference: Rs. 2,000
- Total Expenses: Rs. 25,000
Again, this is just an example. You may have a different set of expenses. Just add this all up.
Step 3: Deduct expenses from revenue to get net profit
Now that you have added up both your total revenue and total expenses, it is time to find out your net profit. For this, simply subtract expenses from revenue.
profit = revenue – expenses
While deducting any expense from revenue, you should keep certain things in mind:
- You are allowed to deduct only those expenses that are directly required to generate income. Don't try to include your personal expenses like food that give you energy to work!… you are not the last person who would see your calculations!
- Expenses like internet connection and electricity can only be allowed as deductions if it is solely for the purpose of your business or profession. You cannot include your total household electricity charges or the internet charge of the Wi-Fi that you and your family use for personal stuffs as well. For availing these deductions you need to segregate these expenses as household purpose and business purpose to the satisfaction level of taxing authorities.
- Same is the case with office equipment and furniture. You will be allowed to charge depreciation on them if and only if they are used only for professional purpose. If you work on your laptop lying in your cozy bed or on that lavish couch, don't expect depreciation to be allowed on these pieces of furniture.
- You need to have a proof of all the expenses to claim deductions. Keep all the vouchers/bills of all the expenses otherwise tax authorities can reject the deductions you claimed without sufficient proof.
- If you buy any equipment for the sole purpose of blogging and freelancing, let's say a laptop, then you are allowed to claim deduction but not the whole amount in one year because it would generate income for more than a year. For your newly bought laptop you'll be allowed deduction at the rate 60%. Things which generate revenue for one year only are allowed to be deducted completely in one year e.g. yearly subscription of a magazine (required for your work), antivirus subscription, internet charges etc.
Step 3. Subtract the deductions allowed from your net profit
Are you liable to pay income tax on the entire net profit? No!
There is a list of deductions allowed according to the Section 80 in Income Tax Act, which applies to every individual calculating their taxable income. So, as a blogger / freelancer, you can also avail of these deductions.
At present you can save tax on Rs. 1,50,000 under various deductions allowed under Section 80. You can make specific investments of up to Rs. 1,50,000 and save tax on this amount.
So, if you really make these investments, you can further subtract Rs. 1,50,000 from your net profit to get your final taxable income.
Final Taxable Income = Revenue – (Expenses + Various Deductions)
We recommend that you consult a good financial advisor in order to take the proper benefit of the deductions allowed.
Step 4: Now, dear blogger, calculate your income tax!
Finally, it's time to calculate your income tax liability. At present, Indians need to pay income tax according to the following slabs. Please note, that these slabs and tax percentage are altered from time to time (especially in the General Budget of India).
Tax slabs and tax rates for Financial Year 2016-17
- Income up to Rs. 2,50,000 is tax free
- From Rs. 2,50,000 to Rs. 5,00,000 you have to pay 10% tax
- From Rs. 5,00,000 to Rs. 10,00,000 you have pay 20% tax
- Above Rs. 10,00,000 you have to pay 30% tax
Again to demonstrate, let's assume that your taxable income as a blogger or freelancer is Rs. 12,00,000. So, how much tax would you need to pay? Let's see:
Blogger's income tax on taxable income of Rs. 12,00,000
- Income from Rs. 0 to Rs. 2,50,000 is tax free.
- So, you don't need to pay any tax on this.
- From Rs. 2,50,000 to Rs. 5,00,000 you have to pay 10% tax.
- You pay Rs. 25,000 tax on Rs. 2.5 lakh of this slab
- From Rs. 5,00,000 to Rs. 10,00,000 you have pay 20% tax.
- You pay Rs. 1,00,000 tax on Rs. 5 lakh
- Above Rs. 10,00,000 you have to pay 30% tax
- You have Rs. 2 lakh income in this slab. So, you pay Rs. 60,000 in this slab
Your total income tax liability would be (25,000 + 1,00,000 + 60,000 = Rs. 1,85,000)
Tax Deducted at Source (TDS)
Please note that most registered companies deduct TDS while paying to freelancers. Banks deduct TDS from the interest paid on Fixed Deposits (FDs). TDS is the tax that you have already paid. You should get TDS certificate from all the organizations who have deducted TDS from your payment. All the TDS you have paid should be deducted from the overall tax liability.
Now that you know how to calculate your taxable income and income tax, let's clear a few doubts that you may have as a blogger or freelancer.
Does a blogger need to pay service tax?
The answer is both, yes and no. You need to pay service tax if you are selling some merchandise through your blog or website. If the goods you sell involve export or import or if you sell things out of India then there are other taxes lined up for you. But, if your website or blog is like TechWelkin that is not involved in selling any stuff you need not worry about any indirect taxes like service tax, custom tax etc.
Does income from Google AdSense come under the purview of service tax?
Well, the answer to this question is embedded in the answer of previous question. But it is necessary to explain this point separately as there is lot of confusion around the topic. This confusion was created after enforcement of a law that states selling of internet advertising space would also attract service tax. You should, at this point, understand that as an AdSense publisher you don't sell any space for advertising. You have only done a tie-up with Google AdSense which actually sells the advertising space. You are only earning a commission from your tie-up. So you need not worry about service tax for your Google AdSense income. Service tax, if any, will be paid by Google.
Which ITR form a blogger or freelancer needs to file?
If you are a full-time blogger or freelancer, you need to fill ITR-4 while filing your income tax return. ITR-4 is meant for professionals and business persons.
If you are a part-time blogger or freelancer then you must be file ITR for your overall income. You can just show your income from blogging and freelancing as income from other sources in the ITR you already file.
It is always better to fill ITR-4 as then you can claim expenses incurred in running your blogging business.
Hope this article helped to answer your questions about how a blogger or freelancer should file income tax. If you have any more doubt, feel free to drop your query in the comment section. Thank you for using TechWelkin!