In the growing gig economy, freelancers and independent contractors form a significant part of India’s workforce. They provide services across sectors such as technology, design, consultancy, and content creation. However, many businesses and individuals hiring freelancers are often unsure about how to comply with tax deduction requirements. Understanding TDS rules for freelancers and contractors is essential for both payers and recipients to ensure tax compliance and avoid penalties. Additionally, exploring investment options like a tax saving fixed deposit helps freelancers manage their tax liability efficiently.
What is TDS and why it is applicable
TDS (Tax Deducted at Source) is a system under the Income Tax Act that requires the payer to deduct a certain percentage of tax before making a payment to the recipient. It ensures that the government collects tax at the time income is generated rather than waiting for the annual filing of returns.
For freelancers and contractors, TDS is deducted under Section 194J or Section 194C, depending on the nature of the service provided.
Sections governing TDS for freelancers and contractors
- Section 194J – Professional Services:
Applicable to payments made for professional or technical services such as consultancy, legal, medical, design, or IT services. The TDS rate is 10 per cent when the payment exceeds Rs. 30,000 in a financial year. - Section 194C – Contractual Services:
Applies to payments made under a contract for services such as manufacturing, advertising, or delivery. The TDS rate is 1 per cent if the recipient is an individual or Hindu Undivided Family (HUF), and 2 per cent for others.
Understanding which section applies is crucial for accurate deduction and reporting of TDS.
How to calculate and deduct TDS for freelancers
Here is the general process for deducting TDS:
- Identify whether the service falls under professional or contractual work.
- Ensure that the total payment to the freelancer in a financial year exceeds Rs. 30,000.
- Calculate TDS at the applicable rate—10 per cent for professional services or 1–2 per cent for contractual services.
- Deduct the amount at the time of payment or credit, whichever occurs earlier.
- Deposit the deducted amount with the Income Tax Department within the stipulated time.
- File the TDS return and issue a TDS certificate (Form 16A) to the freelancer.
This ensures transparency and allows the freelancer to claim credit for the tax deducted while filing their income tax return.
When TDS is not applicable
There are certain cases where TDS is not required to be deducted:
- If the total payment to a freelancer in a financial year does not exceed Rs. 30,000.
- When the freelancer provides a valid certificate for lower or nil TDS deduction issued by the Income Tax Department.
- If the recipient’s total income is below the taxable limit and they have submitted Form 15G or 15H.
These provisions help prevent unnecessary tax deductions and ensure compliance without burdening individuals with refunds later.
How freelancers can claim TDS credit
Freelancers whose clients deduct TDS can claim credit for the deducted amount while filing their income tax returns. The deducted tax appears in Form 26AS or the Annual Information Statement (AIS) on the Income Tax portal.
To ensure proper credit, freelancers should:
- Verify the accuracy of TDS details in Form 26AS.
- Collect Form 16A from clients as proof of deduction.
- File returns using the same PAN used for TDS deductions.
This ensures that the deducted tax is correctly adjusted against the total tax payable.
TDS compliance requirements for payers
Businesses or individuals responsible for deducting TDS must comply with certain procedural requirements:
- Obtain a Tax Deduction Account Number (TAN).
- Deduct the applicable TDS before payment.
- Deposit the TDS by the 7th of the following month.
- File quarterly TDS returns (Form 26Q).
- Issue Form 16A to freelancers within 15 days of filing the return.
Failure to comply with these requirements may result in penalties, interest, or disallowance of expenses under the Income Tax Act.
How TDS affects freelancers’ income
Since TDS is deducted at the source, freelancers receive a lower amount than the total billed value. However, it does not mean they lose this amount permanently. It is treated as advance tax and adjusted against their final tax liability when filing returns.
For instance, if a freelancer earns Rs. 10 lakh in a year and Rs. 1 lakh is deducted as TDS, this amount is credited in their tax records and can be used to offset their total tax payable.
Importance of tax planning for freelancers
Freelancers often face irregular income flows, making tax planning crucial. Investing in eligible instruments such as a tax saving fixed deposit under Section 80C helps reduce taxable income. Such FDs have a five-year lock-in period and qualify for a deduction of up to Rs. 1.5 lakh per year.
Using this strategy not only lowers annual tax liability but also builds disciplined savings over time. Pairing TDS compliance with smart investments ensures both legal adherence and financial stability.
Please note: Bajaj Finance does not offer tax-saving FDs.
Using tax saving fixed deposits for stable returns
A tax saving fixed deposit is one of the safest and most straightforward options for freelancers looking to save tax and earn steady returns. Many banks offer digital tax-saving FDs.
You can invest up to Rs. 1.5 lakh annually, choose a five-year tenure, and enjoy guaranteed returns. Additionally, the online FD calculator allows freelancers to estimate their maturity value and plan accordingly. Combining TDS management with Bajaj Finance FDs creates a balanced approach to both compliance and wealth creation.
Final thoughts
For freelancers and contractors, understanding TDS rules is vital to maintaining compliance and avoiding future tax disputes. Proper deduction, documentation, and timely filing ensure smooth reconciliation during income tax return filing. At the same time, using a tax saving fixed deposit under Section 80C allows freelancers to minimise taxable income and build secure long-term savings. With the right balance of compliance and planning, independent professionals can manage taxes efficiently while growing their wealth steadily.
