If you offer your services through such platforms, you will be considered as an e-commerce participant, and the new tax section and TDS will be applicable to you
Are you a freelancer registered through e-commerce portals that facilitate assignments such as content writing, graphic designing, translation, transcription and so on? Chances are that you would have received an email informing you of a change in the income tax laws that necessitate tax deduction at source before the payments are credited to your account.
The e-commerce operator through which you provide your services will now pay you after deducting tax at 1 percent (0.75 percent till March 31, 2021) under the new section 194-O.
The changes you ought to know
Announced in the Union Budget 2020, the newly-introduced section 194-O has come into effect from October 1, 2020.
This is applicable to entities that are specifically defined as e-commerce operators under this section. “E-commerce operator means a person who owns, operates or manages digital or electronic facility or platform for electronic commerce,” the section states.
So, if you sell your goods or offer your services through such platforms, you will be termed as an e-commerce participant, and the new section and the TDS rate will be applicable to you. For example, if you take up a freelance assignment that is listed on an aggregator online platform such as freelancer.com, upwork.com or fiverr.com, you will now be covered under Section 194-O. These platforms are like marketplaces. They connect those who seek freelancers (by listing their projects online) and actual freelancers who wish to take up such assignments. They offer freelance assignments pertaining to legal, medical, engineering, architectural and accountancy professions, among others. So, the new rule will not apply to freelancers who do not deal with e-commerce operators.
The newly-created Section 194-O imposes a TDS deduction of one percent. And this has been temporarily reduced to 0.75 percent until March 31, 2021 on account of the COVID-19 pandemic. “The TDS is on the value of the goods sold or services facilitated through the e-commerce operator’s platform,” explains Archit Gupta, Founder and CEO, Cleartax.in.
Such freelance platforms have been around for a long time. But till date, you were covered under the old Section 194J. The section 194J still continues, but Section 194-O has been specially carved out for e-commerce platforms.
The older Section 194-J imposes a higher TDS of 2-10 percent (reduced to 1.5-7.5 percent till March 31, 2021), depending on the nature of services and once your receipts cross Rs 30,000, the TDS comes into play.
The new Section 194-O is liberal. Apart from a lower TDS rate, it gets deducted if your expected fees – gross receipts – exceed Rs 5 lakh in a financial year. But TDS on the e-commerce portal “will be applicable at a higher rate of 5 percent, irrespective of the amount of annual gross receipts, if you do not furnish your PAN or Aadhar to the e-commerce portal. In any case, you would be able to claim the credit of the TDS, and they should adjust their advance tax calculations accordingly,” says Vaibhav Sankla, Principal, Billion Basecamp Family Office.
If you do not expect to earn over Rs 5 lakh this financial year, you must inform your e-commerce operator in advance. “Those who are unlikely to earn over Rs 5 lakh in a financial year need not worry, as TDS won’t be applicable to them. However, it would be a good idea for them to write to the e-commerce platform companies beforehand to ensure that their taxes are not withheld unnecessarily,” advises Sankla.
Uneven income streams, tighter financial planning
Tax planning apart, freelancers and those with irregular or seasonal income streams also need to work harder at putting an effective financial planning strategy in place.
Make sure you have liquidity to take care of any contingencies. Have a tidy sum in your bank account. Debolina Raja, 40, a freelance content writer based in Mumbai says this is crucial if you are paying loan equated monthly instalments (EMIs). “A comfortable savings cushion helps in such cases,” she says Debolina.
Optima Money Managers Founder Pankaj Mathpal recommends maintaining two separate accounts – one to make and receive your business-related payments and another to act as your personal savings account. “From your business receipts, pay yourself a fixed salary by transferring this amount to your personal account. This is easier said than done, but will ensure discipline in savings and spending,” he says. Despite your relatively irregular source income, you would know that you have fixed sum to fall back on. “Freelancers could earn Rs 1 lakh in a month, for instance, and nothing at all in the subsequent month. Your ‘salary’ that you pay yourself will ensure that your monthly budget is not affected,” he adds.
Salaried individuals should ideally have at least six months’ worth household expenses tucked away in a secure bank fixed deposit for any emergency. Freelancers need a much larger kitty – it should be capable of taking care of at least 12 months’ expenses, including EMIs if any, if they happen to draw no income during the period.
Next, ensure that you have adequate life and health insurance cover in place. Your savings and investments are important too. Debolina, for instance, has been investing in equity mutual funds through systematic investment plans (SIP) for the last five years. As with any financial plan, your investments should be linked to specific goals such as buying a house, saving for children’s higher education and your retirement.
Take, for instance, the case of Sourav Chaterjee, 34, a Mumbai-based visual effects (Vfx) professional, whose income tends to be seasonal. “I ensure that I invest at least 25 percent of my income every month. I invest heavily in equity and debt mutual funds through SIPs. I also invest systematically in stocks every month – these investments are linked to my long-term goals like child’s higher education funding and my retirement planning,” he explains.Finally, be extremely cautious while taking any loan; even a home loan. “If you feel you can afford an EMI of Rs 1 lakh, take a loan that comes with an EMI of, say, Rs 50,000 so that you are never under pressure due to lower income in a particular month. Your uneven income flow necessitates this kind of conservatism,” says Mathpal.