Legal formalities for developers who wish to start freelancing

About 6 months back I started exploring the possibility of doing freelance and earning some extra income. I didn't know where to start and what legal angles I need to take care of. Today I've completed all the steps needed to legally receive payments in foreign currencies working remotely from India.

This post is an attempt to list all these steps (which will hopefully reduce your hassle if you want to freelance for an overseas client).

  1. You need a "Shop Act" Certificate

    • This is needed before you apply for a GST number
    • You need to name your "firm" e.g. ABC Software Solutions (Your bank may ask you to generate Invoices that contain your firm's name to settle your payments)
      • My CA asked me to get the name of my firm printed on a piece of paper and take a photo with it for uploading it as supporting documents

  2. Get a GST number as a registered proprietor

    • A GST officer may visit your "place of work" for verification. In my case, they didn't.
    • If your gross payment as a freelancer is below 20L, you don't need to be GST registered. However, assuming it will go above that eventually, it's better to get it from the start.

  3. A current account

    • This is the account in which you will receive your payments
    • You need to add your bank account details to your GST portal (in other words, your Current account is linked with your GST number)
    • Be sure to properly discuss the USD (or whatever) to INR conversion charges the bank will be taking. I did not know about this, and got duped for the first time when the bank charged me a hefty amount during the conversion. Since you're technically a business account, you're a high priority customer now. So the forex people in the bank will entertain your requests to give a better conversion deal. This also depends on your transaction value.

  4. A contract (offer letter) from your client that clearly mentions the name of your firm (This may not be strictly necessary, as banks generally ask Invoices mentioning both parties for each payment. But it's always good to have things clearly on paper).

  5. File "LUT FORM & RFD-11" (This "Letter of Undertaking" is needed to make yourself exempt from paying GST. Your CA would know more)

Advantages of freelancing:

  • If your gross bills are less than 50 Lacks in a financial year, you are eligible to take advantage of section 44ADA while filing income tax. I.e. You can write off (w/o maintaining books) 50% of your income as business expenses and have to pay income tax only on the remaining 50%. In that you can again claim more deductions like Section 80C, Home loan interest paid etc.

For Instance,

Assuming you receive payments worth 40 Lacks INR in a financial year, you can write off 20 Lacks as business expenses straight away. Then, assuming you utilise full 1.5 Lacs limit of section 80C, effectively your taxable income (called profit) is actually just 18.5 Lacs.

If the gross income from freelancing goes above 50L, you will pay income tax like any other regular individual. Except , you can claim some "business expenses" (example below).

IMPORTANT: You will only have to pay income tax, NOT GST. You also don't need an Import-Export (IE) license; as you're not exporting any physical goods. You need to make this clear to your CA. You're working as a professional providing software services. You need to file an LUT on the GST portal mentioned in step 5 above.

  • Another benefit of being GST registered is – you can claim the GST you paid while purchasing equipments/software for your business purposes. E.g. If you purchase a router from Croma (or Flipkart/Amazon), you can ask for a GST bill. You can file a GST claim and the tax you paid on the router purchase will be returned to your bank account. NOTE: The business purchases must happen from the bank account linked with your business, not from your personal savings account. I made the mistake of purchasing something for the office using a personal credit card. Apparently you can't claim a GST return on that.

Also – you can still be employed as a regular employee (deducting PF, TDS and whatnot) while doing freelancing. While filing your ITR, the income from freelancing will go under the "Income from Profession" head.

Hopefully, these steps will help you get better clarity on what you need to do. Kindly note that this is not an exhaustive list. I've just mentioned the main important steps. I'm by no means a CA or a tax expert. So the exact details of what/how you have to pay tax may vary based on your situation. Please consult a good CA for that. Best to do all this via a registered CA.

EDIT: A reader points out that if you get GST registered before your income from freelancing goes > 20L, you will need to pay GST. As far as I know, if your client is working in India, only then you'll need to pay GST. Be sure to get this clarified from your CA.