After the pandemic lot of people in India took up freelance work for US companies in India, especially on freelance marketplaces like Upwork, Fiverr, Freelancer & others. In this post, I am discussing the tax obligations that the freelances should know to comply properly while working remotely for US companies in India & avoid heavy penalties in case of non-reporting of such incomes in India.
Is this income from US client taxable in India?
Taxability of income in India depends on your tax residential status as defined in Section 6 of Income Tax Act. So, if you qualify as a “Resident & Ordinarily Resident” under Indian Income Tax law, you are liable to be taxed on your worldwide income in India. However, in case you are a Non-Resident or RNOR, you are only taxed in India to the extent the income is from sources in India.
As a basic rule, if you’ve been >182 days in India, you qualify as a tax resident of India. Check this post for a finer discussion on how to calculate your tax residential status in India –
Do I need to file a tax return in India?
You will need to file a tax return in India if your total income (from all sources) as per Indian tax law for the financial year exceeds INR 3 lacs (as per new tax regime. INR 2.5 lacs for old tax regime). However, as a tax practitioner I highly advise anyone with a PAN to file a tax return in India even if income is below exemption limit. You need to have a valid PAN & Aadhar to file the tax return in India.
Can I claim benefit of Presumptive Taxation Scheme in India?
If the income you’ve earned is in nature of a business income, you can claim the benefit of presumptive tax provisions under Section 44AD or Section 44ADA of the Income Tax Act. These provisions help you pay tax on a fixed percentage of gross receipts from your business. If you opt for this, you do not need to maintain books of account.
Briefly explained below –
- Section 44ADA – if engaged in specified professions like CA, CS, software, technical consultancy, filmmaking etc. and your turnover for the financial year is less than 75 lacs – you will have to offer 50% of total receipts to tax
- Section 44AD – if you are engaged in any other business, and your turnover for the financial year is less than 75 lacs – you will have to offer 6% of total receipts to tax
Can I claim the deduction for home office in my tax return in India?
If you opt for presumptive tax scheme, you offer a flat % of income & all deductions are deemed to be allowed. However, if you don’t/can’t claim the benefit of presumptive tax provisions, you will need to maintain books of accounts & you can definitely claim the respective deductions. Ensure you only claim deductions of genuine expenses for which you have documentation available & supported by corresponding debit entries in your bank account.
What are my tax obligations on this income in the USA?
If you qualify as a Tax Resident of India, you need not file tax return or pay tax on this income in USA. This is because of the beneficial provision in the Article 15 of India-USA DTAA as follows –
ARTICLE 15 – INDEPENDENT PERSONAL SERVICES
Income derived by a person who is an individual or firm of individuals (other than a company) who is a resident of a Contracting State (India) from the performance in the other Contracting State (USA) of professional services or other independent activities of a similar character shall be taxable only in the first-mentioned State (India) except in the following circumstances when such income may also be taxed in the other Contracting State:
- if such person has a fixed base regularly available to him in the other Contracting State (USA) for the purpose of performing his activities; in that case, only so much of the income as is attributable to that fixed base maybe taxed in that other State (USA); or
(b) if the person’s stay in the other Contracting State (USA) is for a period or periods amounting to or exceeding in the aggregate 90 days in the relevant taxable year.
2. The term “professional services” includes independent scientific, literary, artistic, educational or teaching activities as well as the independent activities of physicians, surgeons, lawyers, engineers, architects, dentists and accountants.
As we can see above, except in some cases, the income is taxable only in India. You can provide your client in USA with a withholding
Coming to withholding tax in USA (what we call TDS in India), generally US companies have to deduct 30% tax withholding tax on payment to foreign persons under US tax law. However, if you qualify as a Tax Resident of India, you can provide a declaration in Form W8BEN to your US client to deduct tax at a lower rate (generally nil/1%)
However, note that if you qualify as a tax resident of USA, (for example, US citizen/GC holder/ passing other residential tests in USA) you need to file tax return & pay tax on this income there as well. You also CANNOT provide W8BEN to your US client in such case. You however can claim a substantial amount as a Foreign Earned Income Exclusion (FEIE) in your US tax return to nullify the tax liability on this income in USA.
Also see – Taxation of US persons: An Overview
Do I need to declare my tax status for withholding tax purposes on the freelance portals?
Yes. US tax rules have a provision to deduct flat 30% tax on payments outside India. In case you update your tax status these portals will charge you a lesser withholding tax rate. So make sure you update the correct tax status on these portals.
Which entity structure should I choose for my freelance work?
Sole Proprietorship is the default structure which applies as you start doing freelance work. You can simply open a separate current account in your name (this will not require any licenses etc – only Aadhar & PAN) & get going. Down the way as your business picks up, you may feel the need to protect your personal assets from business creditors or want to raise funds. Then you can explore entity structures like OPC, LLP & Private Limited Company. Note that these structures come with enhanced compliance requirements which may not be needed for you. So, keep it simple as sole proprietorship & upgrade for the right reasons only.
I qualify as a non-resident/ ROR from Indian tax law perspective. How to not be liable for taxation on this income in India?
In this case, ensure that you receive this money in a US bank account & NOT directly receive this money in India. If the money directly hits an Indian bank account, you will be liable to pay tax on it in India, irrespective of your tax residential status in India. Later on, you can remit the money to your Indian NRE account no problem. But also take care of deemed residency rules introduced in Indian tax law in 2021 – if you are an Indian citizen & earn > INR 15 lacs in a financial year & your income is not liable to be taxed in any country, you are deemed as resident of India & will have to pay tax in India.
I am an expat/ internationally mobile executive & live & work in different countries. What would be the tax implication in that case?
Income will be taxable to you in India only if you are a Resident & Ordinarily Resident of India. If not & you’re not an Indian citizen, there is no tax implication for you in India. However, be mindful of the tax implication in USA especially if as per the tax treaty between USA & country of your residence, you tie-break to being a US resident.
Are there any tax implication on me under Goods & Services Tax in India?
GST law in India requires a person offering services having a turnover of INR 20 lacs to register under GST. So, till you have (or expect to have in a financial year) INR 20 lacs sales, you don’t need to register under GST. Once you’re registered under GST, your remote work will qualify as export of services which is considered a zero-rated supply & hence exempt from GST. However, you’ll have to file a Letter of Undertaking (LUT) once every financial year on the GST portal to export the services GST free, else Integrated GST (IGST) will be applicable on those services. LUT filed for a financial year will be valid for the whole year.
I missed filing tax return/ failed to disclose foreign income in my Indian tax returns. What to do now?
In view of penalties & prosecution related provisions as per Black Money Act in India (see this article for detailed discussion – Retuning NRI/OCI’s Guide to India’s Black Money Act), immediately try to see if you can file a belated/revised return (timeline for the same is 3 months prior to end of assessment year). Or you can file an updated return (timeline is upto 24 months from the end of relevant assessment year). Try to file the return & pay appropriate tax in this window if available.
I selected wrong ITR form in India while filing my tax return for this income?
You have 2 options – either wait for email from Income Tax Department regarding defective return in which case you have 15 days’ time to file the return. Or you can file an updated return under Section 139(8A) of the Income Tax Act upto 24 months from the end of relevant assessment year.
What are the compliances with the Indian bank that I should be mindful of?
As this is an income from outside India, usually banks ask you to file a declaration of the incoming income before releasing it into your bank account. Generally, as your income hits the bank, they send an automated email asking you to login to Netbanking & file a simple declaration where you have to select the purpose code, destination country etc. Only when you declare this will the funds will be released into your account.
What other things I should keep in mind from a tax perspective?
Have a separate current bank account for your business. Preserve the documentation – invoices, US tax withholding forms, past tax returns, foreign inward remittance (FIRC) etc. in a separate folder in your PC. Put a reminder to file India taxes every year well before July 31.
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