Freelancing Along with a Full-Time Job in India? Here’s What You Should Know

You are in India on a full-time payroll with an Indian company. At the same time, you plan to earn income from foreign clients through freelance or remote consulting work, whether via platforms like Upwork, direct contracts with US startups, or assignments from EU agencies.

This arrangement is legally permitted in India but it is important to understand the tax, regulatory, and compliance obligations that arise under Indian law. Incorrect structuring or incomplete compliance at the beginning can later lead to penalties, interest, or regulatory scrutiny, even where income is fully disclosed and tax is paid.

Employment Contract and Corporate Risk (Often Ignored)

Tax law allows freelancing, but your employment contract may restrict it. Many contracts contain clauses on moonlighting, conflict of interest, confidentiality, and ownership of intellectual property.

Paying tax correctly does not protect an employee from action by the employer. Indian courts have consistently held that contractual obligations operate independently of tax compliance. If your contract requires disclosure or approval for outside work, obtain it in writing.

Professionals should keep employment and freelancing activities strictly separate. Using the same laptop, office VPN, Git repository, or cloud credentials for freelance work can expose you to allegations of misuse of employer resources or IP violations.

How Freelance Income Is Taxed Under Indian Law

Indian tax law taxes income under specific heads. Salary earned from an Indian employer is taxed under “Salaries.” Income earned from freelancing or consulting for foreign clients is taxed under “Profits and Gains of Business or Profession.”

This classification is mandatory and cannot be altered for convenience. The Supreme Court has held that income must be taxed under its correct head even if another head appears simpler or more beneficial.

For example, if an IT professional earns Rs. 20 lakh as salary and Rs. 40 lakh from a US client for software consulting, the Rs. 40 lakh must be reported as business income. It cannot be merged with salary or shown as “Income from Other Sources.”

This classification affects expense deductions, advance tax liability, audit applicability, and return form selection.

Choosing the Correct Income-Tax Return Form

When a taxpayer has salary income along with business or professional income, the correct return form is ITR-3.

However, ITR-4 is not automatically wrong. The correct form depends on facts:

• If you opt for Section 44ADA, your receipts are within limits, and you hold no foreign assets at any time during the year, ITR-4 can be used.

• If you hold any foreign asset (even a PayPal or Wise balance) on 31 March ITR-3 becomes mandatory.

• If turnover exceeds the Section 44ADA limit, ITR-3 is mandatory.

Filing ITR-4 when foreign assets exist results in non-disclosure under Schedule FA.

Presumptive Taxation Under Section 44ADA

Section 44ADA provides a simplified scheme for professionals. Under this scheme, 50% of gross receipts are treated as taxable income, and detailed expense records are not required.

The limits are:

• Rs. 50 lakh normally

• Rs. 75 lakh if at least 95% of receipts are through banking channels such as bank transfer, UPI, PayPal, Wise, or other RBI-approved modes

If receipts exceed Rs. 75 lakh, Section 44ADA cannot be used. If income is declared below 50%, normal books apply and tax audit may be required.

For example, if a consultant earns Rs. 60 lakh from foreign clients through bank transfers and opts for Section 44ADA, taxable income is Rs. 30 lakh.

Advance Tax: Understanding Sections 234B and 234C

Freelance income does not have tax deducted at source like salary. If total tax payable after salary TDS exceeds Rs. 10,000, advance tax applies.

Two interest provisions are relevant:

Section 234B applies when at least 90% of total tax is not paid as advance tax. Interest is charged at 1% per month and is mandatory. This is the most common provision affecting freelancers.

Section 234C applies to deferment of advance tax instalments. It applies in limited cases where tax liability is reassessed later. It is less common for freelancers.

For example, a salaried employee earns Rs. 45 lakh from freelancing but pays no advance tax. Even if full tax is paid at return filing, interest under Section 234B will still apply.

Foreign Tax Deduction and Foreign Tax Credit (Form 67)

Some foreign clients deduct tax before payment. In such cases, the full income must still be reported in India.

Foreign tax credit can be claimed under the applicable Double Taxation Avoidance Agreement (DTAA) by filing Form 67 as part of the return. Supporting documents include foreign tax deduction proof and, where required, a Tax Residency Certificate.

The credit is limited to the lower of:

• tax paid abroad (converted to INR), or

• Indian tax payable on that income

FEMA and Banking Compliance

Freelance services to foreign clients are treated as export of services under FEMA.

As per RBI notification dated 13 November 2025, export proceeds must now be realised within 15 months from the invoice date (extended from 9 months). Advance payments can be received up to three years in advance.

For example, if you raise an invoice on 15 January 2025, payment must be received by 15 April 2026.

Failure to realise proceeds within this period can result in FEMA penalties, bank account flagging, and reassessment risk. Extensions must be sought from the authorised dealer bank before the deadline.

Banks typically require contracts, invoices, e-FIRA (electronic Foreign Inward Remittance Advice), purpose codes, and invoice-remittance reconciliation. FEMA records must generally be retained for six years.

GST Implications for Foreign Freelancers

Export of services is zero-rated under GST if conditions are met, and most freelancers operate under a Letter of Undertaking without charging GST.

However, reverse charge GST is a major hidden risk. Payments to foreign SaaS providers, software tools, or platforms for business use are treated as import of services.

This mandatorily triggers GST registration, even if freelance income is below Rs. 20 lakh.

For example, paying for Adobe Creative Cloud, Canva Pro, or Upwork commissions for client work attracts GST under reverse charge, requiring registration and compliance.

Tax Audit Triggers Under Section 44AB

A tax audit becomes mandatory if:

• professional receipts exceed Rs. 1 crore, or

• receipts exceed Rs. 50 lakh and income declared is below 50% under Section 44ADA

Audit increases compliance cost and timelines and must be completed before return filing.

A Consolidated Example

A professional earns Rs. 18 lakh salary and Rs. 60 lakh from foreign freelancing. He opts for Section 44ADA, pays advance tax, converts income correctly under Rule 115, reports PayPal balance in Schedule FA, files Form 67 for US tax deducted, complies with FEMA timelines, registers under GST due to reverse charge, and maintains full documentation.

Such a structure is fully compliant and sustainable.

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