Freelance Career / All Things Legal / Freelancing guide

Freelancer's guide to tax (GST), registration, contracts and payments

. 6 min read . Written by Vanshika Goenka
Freelancer's guide to tax (GST), registration, contracts and payments

Legal Requirements For Freelance Work

You are all set to begin a career in freelancing, your dream is to to get paid doing something that you love and at your own schedule.

You want to do things the right way hence it’s imperative to know the legal requirements for freelance work in India. There must be a lot of questions on your mind, confusing technicalities and legalese that we are here to explain to you clearly.

For our in-depth guide on everything you need to know about become a freelancer in India, click here.

Here’s what we will cover in this article.

How to register a freelance business

Freelancer tax in India (Including GST & income tax)

Freelance contract template & examples

Receiving payments

FAQs (In case you’re in a hurry)

You can click on the links above to navigate to a section, or you can read the complete guide. Trust me, you’d want to do that anyway.

Registration & license for freelance work in India

Let me put this so that there is no doubt. If you’re starting out as a freelancer, it is not essential to register as a proprietorship or company. You can keep working as a individual and quote your PAN number for taxation purposes as long as your annual income from freelancing does not exceed 20L per annum. TDS (Tax deducted at source will be processed on your PAN card and reflect on your income tax)

In other words you do not need any kind of trade license to start freelancing in India if you earn below 20L per annum but it is a good idea to at least register as a basic proprietorship for various business related reasons like.

  • You can open a current account in a bank and issue receipts in your company name (in case you want to accept payments more than 10L
  • You can claim input tax credit of GST for your business related expenses

Freelancer tax in India (GST & income tax)

Just like any individual who earns any sort of income, freelancers too have to pay taxes according to government regulations.

GST for freelancers

When a freelancer’s annual income exceeds Rs. 20 lakh in a financial year (all states in India except the North Eastern States), she is applicable for a GST registration. She needs to pay the 18% goods and services tax (for most services) from any income earned from freelance services (that are mostly done online). For North East Indian states the limit is 10L per annum.

The rate is 18% for most freelance services provides however there might be exceptions. For a list of GST rates for services click here.

Freelance income tax

Income tax laws in India state that any revenue generated by an individual by implementing their skills is considered an income from a profession. And the income a freelancer earns is the sum of all receipts that she gets from your clients. So is therefore, taxable income, beyond a point.

For freelancers, incomes up to Rs 2.5 lakh is not taxed. Income between the values 2.5 lakh to 5 lakh are taxed at 10%. 5 to 10 lakhs at 20%, and above 10 lakh at 30 per cent. A freelancer can use the form ITR 4 while filing the tax returns.

freelancer income tax in india brackets
Freelance income tax brackets in India

You can use Form 26 AS that is linked to your PAN number, and helps you know all the TDS that has been deducted. As a freelancer, you may also be required to pay Advance Tax. Advance Taxation is the payment of taxes during frequent intervals, in a given year, instead of paying the tax once, during a given year.

According to Section 80 of the Income Tax Act, a freelancer can cut down her tax outgo by more than Rs 1.5 lakh. That is, if she invests a specific amount in tax-saving instruments.

legal requirements for freelance work

Freelance Contract

One of the top struggles in a freelancers life is getting paid. Disputes arise when there is a mismatch of expectations hence drawing out a clear and comprehensive contract is necessary.

The scope of the work and payment terms need to be mutually decided, finalized and written in the contract in a clear manner so that there is

As a freelancer, here are a few things to consider including in your contract.

  • Compensation: The agreed amount that needs to be paid after completion of work
  • Timeline: A deadline set mutually by both parties 
  • Scope of work: Defines the freelancer’s nature of work during the tenure of the agreement
  • Additional services: Payment terms set by the freelancer for any extra effort 
  • Late payment clause: A freelancer can charge an interest rate or set any other terms. (this is very important as some clients don’t release payments on the said time)
  • Advance payment: This clause allows freelancers to charge a specific sum in advance
  • Termination: Circumstances under which the client can choose to terminate the contract
  • Confidentiality: During the tenure, a freelancer should not disclose the work information to any third party
  • Privity: Showcases the relationship between the client and the freelancer

Here are the clauses that you need to include in your freelance contract:

  • Scope or purpose of work 
  • Timeline of the contract, termination and commencement
  • Payment timeline and mode 
  • Verification of basic information
  • Most importantly, a valid consideration under Section 2(d) India Contract Act, 1872

Receiving payment for freelance work in India 

For Indian clients, direct bank transfer is the easiest way to receive payments. The clients can initiate NEFT or IMPS. While NEFT may take up to one business day to clear out payments, IMPS transactions are cleared instantly. There might be some charges for IMPS but that is chargeable on the client’s end and the exact charges depend on the client’s bank.

For an in-depth guide on how to start and find work as a freelancer in India, click here.

All you need to do is provide your clients with your bank account number and IFSC code for this. It’s one of the best payment methods for Indian freelancers because it’s easier for you to manage your finances and file taxes at the end of the financial year.

Best payment methods for freelancers in India

  • Paytm: PayTM is the quickest way to receive payments, provided you and your clients have PayTm accounts with the KYC done. You can also create a business account to generate customised QR codes and payment links that you can then share with your clients.
  • GooglePay – Google Pay (Tez) is a great alternative to PayTM. You can pay or receive money using your existing bank account. When a client makes payment to your mobile number through Google Pay, the money is deposited into your bank account. There are no transaction charges or KYC process involved.
  • Instamojo – With Instamojo, you can create customised payment links and share them with your clients. (PayPal also has this feature, but it doesn’t support INR payments and many Indian debit cards). So for clients who are based in India, they can use their Indian debit or credit card to make instant payments to you. Instamojo supports a wide number of cards, wallets, and netbanking options.

Don’t want to read the entire article? You’ve come to the right place. Here are quick answers to your most pressing questions on legal requirements for freelance work in India.

If you wish to know more about the answer you can click the link within for more details.

How to register a freelance business?

You don’t really need to register your freelance business. At least not when as long as you earn less than 20 lakh rupees per annum. There are advantages to registering yourself as a sole proprietorship at least later on. This is the easiest way to register your business in India.

Jump to section for details of freelance license requirements.

Can I freelance without a business license?

Yes you can.

What is the GST exemption limit for freelancers in India?

20 L per annum income from freelancing for all of India except the North East states where this exemption limit is 10L per annum (In 2020). If your income exceeds this limit you have to register for GST.

Jump to section on GST for freelancers.

Should you draw out a contract for freelance work?

Just like any transaction where services are promised for a price, it is advisable to have a signed contract with all terms and conditions decided beforehand so that there are no disagreements later.

Jump to section on freelance contracts.

how to legally start a freelance business in India

For our in-depth guide on everything you need to know about become a freelancer in India, click here.

Looking for more details on the following freelance professions? How to start? And how to find work? How to be one? Click on the respective titles.

Research Credits: Abhishek Munian. Compiled and edited by Ashutosh Bharadwaj

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