I am a freelancer and I work for foreign clients. How can I reduce my tax outgo and also invest in tax savers?

I am a freelancer and I work for foreign clients. For individuals freelancing in the US or Europe, what are some strategies to minimize taxes? I earn approximately Rs 1-2 lakhs a month from my freelance work in these regions and am seeking advice on how to reduce my tax liability for this fiscal year. Additionally, I would appreciate guidance on long-term tax-saving strategies for the future with steady money flow every month even when work is dry.

Name withheld

Advice by Niyati Shah, Vertical Head – Personal Tax at 1 Finance

When you are hired for specific tasks on a freelance basis, you earn income upon completion and submission of the work. Freelancing allows for flexibility in both work and schedule, although there is no guarantee of steady work. As a freelancer, you are not considered an employee of the company and do not receive benefits mandated by labour laws, such as PF.

Income generated from utilising your intellectual or manual skills is classified as professional income according to Indian income tax laws. This type of income is taxable under the category of "Profits and Gains from Business or Profession". Your gross income is calculated as the total receipts received while engaged in your profession.

As a freelancer working with foreign clients and earning Rs 1-2 lakhs monthly, you're in a unique position where strategic tax planning can greatly influence your financial well-being.

Here's how you can maximise tax savings and secure long-term stability for FY 2024-25:

1. Simplify with Presumptive Taxation (Section 44ADA)

If your professional income doesn't exceed Rs 75 lakhs annually, opting for the presumptive taxation scheme allows you to declare only 50% of your gross receipts as taxable income. This not only reduces your tax liability but also eliminates the need for extensive bookkeeping.

2. Foreign Income Tax Relief – Leverage DTAA Benefits

Since you're working with foreign clients, your earnings are taxable in India but could also be subject to foreign taxes. To avoid double taxation, utilize the Double Taxation Avoidance Agreement (DTAA) by submitting a Tax Residency Certificate (TRC). This lets you claim credit for foreign taxes paid, ensuring you're not taxed twice on the same income. Classify foreign remittances correctly to avoid withholding tax issues.

3. Maximise Your Deductions (Sections 80C, 80D, 80E, 80G)

To further lower your tax outgo, consider:

●    Section 80C: Invest Rs 1.5 lakhs in instruments like ELSS, PPF, Tax-saving FDs, NSC, etc.

●    80D: Claim health insurance premiums (Rs 25,000 for self & family and Rs 50,000 for senior citizen parents).

●    80E: Deduct interest on education loans.

●    80G: Contribute to specified charitable institutions and claim tax benefits on eligible donations.

4. GST on Freelance Services – Zero Tax with Export Benefits

If your gross annual receipts exceed Rs 20 lakhs, GST registration is required. However, as an exporter of services, your income can qualify for ‘Zero-Rated Supply’ under GST, exempting you from tax liability while still allowing you to claim input tax credits. Ensure proper documentation to avoid compliance issues.

Savings tools for long-term for stability

●    Emergency Fund: Maintain a reserve fund covering 3-6 months of expenses. This ensures stability during lean months.

●    Retirement Planning: Regularly invest in NPS, mutual funds, and long-term fixed deposits with higher returns for wealth growth.

●    Diversification of Income: Explore passive income avenues like dividend-paying stocks, mutual funds, or real estate investment trusts (REITs) for consistent cash flow.

By blending these strategies, you can reduce tax stress while building lasting financial security. Consider seeking professional tax advisory to stay compliant and make the most of your hard-earned income.

(Views expressed by the expert are her own. E-mail us your investment queries at askmoneytoday@intoday.com. We will get your queries answered by our panel of experts.)