ITR 2025 Explained: Tax Filing Rules for Freelancers vs. Salaried Professionals

Many independent contractors and consultants are unsure of how their income is taxed differently from that of salaried employees as the ITR 2025 filing season draws near. The primary variations are found in the type of ITR form that must be utilised, the method by which income is determined, the allowable deductions, and the filing dates.

It’s crucial to remember that while freelance or consulting income is taxed under “Profits and Gains of Business or Profession”, salaried income is taxed under “Salaries” when submitting an ITR. In this article, we have summarized how you keep records and what deductions you can take are determined by this classification.

Rules for tax deductions at source (TDS):

Freelancers must adhere to a more intricate set of regulations, although salaried persons frequently use the Form 16 that their employers give them. Employers deduct taxes at the source before disbursing employee compensation under the “Salaries” category. Freelancers, however, are responsible for handling and paying their own taxes.

Clients typically withhold 10% TDS from freelancers’ payments and deposit the money with the government under the freelancer’s PAN. To guarantee that the deducted tax is properly credited, freelancers should get Form 16A from clients and compare it with Form 26AS.

Freelancers vs. Salaried Employees: Understanding Expense Deductions

Without providing any documentation, salaried individuals are eligible for a standard deduction of up to ₹50,000 under the previous tax scheme or ₹75,000 under the current one. However, independent contractors are unable to claim a standard deduction; instead, they are able to claim genuine business-related costs, such as costs of stationery and printing, expenses for conveyance, bills for cell phone and internet, etc.

Freelancers can’t deduct personal expenses. They do have one additional clause, though, which permits independent contractors to deduct a portion of their household’s rent and utilities as business expenses—but only if their residence is utilised for work. This also covers the expenditures of upkeep, repair, and depreciation for assets connected to the job. It should be noted that all expenses must be legitimate, reasonable, and proportionate.

By subtracting allowable business expenses from total earnings, a freelancer’s net taxable income is determined. The freelancer’s total income is increased by additional revenue streams such as rent, interest, dividends, or capital gains, each of which is taxed under its own heading.

Freelancer ITR form:

ITR-3 must be filed by freelancers who are not eligible for presumptive taxes. For instance, precise income and cost reporting is required since presumed taxation regulations may not apply to tutors or educators.

Small taxpayers with business revenue up to Rs. 2 crores are eligible for exemption under the presumptive taxation plan under section 44AD. Businesses with annual income up to Rs. 3 crores may choose presumptive taxation if cash receipts for the year are less than 5% of total revenue. Freelancers and salaried people pay the same taxes; the main distinctions are in how their income is classified, whether they are eligible for deductions, and their compliance obligations.