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Income Tax on Adsense, Affiliate and Other Online Incomes

With the growth of technology and internet access, a new form of business which has emerged is the online business wherein people are providing services online, selling advertisement space, earning through Google Adsense, earning through affiliate marketing etc. Income Tax is levied on all such online incomes as the income tax act clearly states income tax would be levied on all incomes earned in/from India.

Income Tax on Adsense, Direct Ad Sales, Affiliate and Other Online Incomes

Examples are the best method for explaining any new concept and therefore I’ll first start with an example.  For example: You earn Rs. 10,000 by providing some services online. However, to earn this Rs. 10,000 you had to take help of a freelancer and you paid him Rs. 1,500. Moreover, you also had to pay internet expense of Rs. 1,000 and mobile phone expense of Rs. 500. You had also purchased a mobile for providing this service and the depreciation on mobile is Rs. 3000.

In such a case, although the client paid you Rs. 10,000, your effective income was only Rs. 4,000 (i.e. Rs. 10,000 – Rs. 1,500 – Rs. 500 – Rs. 3,000). As your effective income is only Rs. 4,000, the govt will levy income tax only on this Rs. 4,000 and not on Rs. 10,000 per a tax tool.

The amount of Rs. 10,000 which the client paid you is called Revenue and the net amount after payment of expenses is the Income.

The total annual income earned by you would be liable to tax in same manner as explained in the above example. For the purpose of better understating, this has again been summarised below:-

 

Total Annual Revenue (i.e. amt received from Client)

xxx

(Less)

Total Annual Expenses (i.e. amount paid by you for providing service)

(xxx)

(Less)

Depreciation on Assets

(xxx)

(=)

Total Annual Net Income

xxx

 

Rate of Income Tax

Once your annual income has been computed in the manner specified above, income tax would be levied on the same. The rate of income tax depends on the form of organisation. In case you have formed a partnership firm/ company and are receiving the payment in the name of the partnership firm/company, tax would be levied @ 30% (flat)

However, in case it is a proprietorship firm or you are receiving all payments in your individual name and not in the name of the company, income tax would be levied as per the Income Tax Slab Rates. The Income Tax Slab Rates are announced by the Finance Minister in the Budget and keep changing every year. For the prevailing income tax slab rates refer this article: – Current Income Tax Slab Rates in India

Expenses allowed to be deducted

As explained above, the expenses incurred are allowed to be reduced and tax is levied on the income derived after subtracting expenses from the revenue. But that does not mean that you can subtract personal expenses like Watching Movie or Expenses for going on a Vacation.

Only those expenses which are incurred for providing the service or which may lead to additional business in future are allowed to be deducted as an expense. Moreover, you are also required to keep the invoice/bill for the expense incurred which will act as a proof that the expense has actually been incurred.

An illustrative list of expenses which are allowed to be deducted is as follows:-

  1. Payment to Freelancers
  2. Salary to employees, Peon, Office Boy etc
  3. Internet Expense, Electricity Expense, Telephone Expense
  4. Fuel Expense, Commuting Expense etc
  5. Web-hosting expense, Domain Registration expense etc

The above list is only an example for the purpose of your understanding. In short – the general rule is that any expense incurred for providing the service or which may lead to additional business in future is allowed to be deducted as an expense.

Depreciation on Assets

For the purpose of providing the service, if you purchase a high-end laptop costing Rs. 80,000 and expect to use it for 2 years – this is also a kind of an expense only for earning additional income. But you would be making use of this laptop for 2 years whereas the income tax is computed on an yearly basis.

Therefore, in this case the cost of the laptop would be divided over 2 years i.e. Rs. 40,000 each and this would also be allowed to be subtracted from the Revenue. If the life of the laptop had been 4 years instead of 2 years, this cost of Rs. 80,000 would be divided over 4 years and depreciation of Rs. 20,000 (80,000/4) would be allowed to be claimed as depreciation.

All assets purchased for the purpose of providing service and which may give benefit for more than 1 year is allowed to be claimed as depreciation. Examples of some assets are:-

  1. Car
  2. Office Furniture
  3. Mobile. Laptops

The above list is only illustrative and there can be many other assets on which depreciation can be claimed.

Other Relevant Points regarding Tax on Income from Online Business

  1. Income Tax for each year is liable to be paid in Instalments. These instalments are called as Advance Tax.
  2. At the end of each year, you are required to file an income tax return which is basically a computation sheet of the incomes earned and the expenses incurred and depreciation claimed thereon.

The manner of paying income tax and filing income tax return is not much complicated and can easily be done online without the need for going to the tax office. Not only can the income tax be paid online but the income tax return can also be filed online.

If you have knowledge of the tax laws, you can do this yourself as well. Or else, you can even hire a Chartered Accountant for doing this for you. CA usually charges Rs. 10,000 to Rs. 20,000 for small business organisations. However, in case the scale of business is larger, they may charge higher fees.

This article is only an overview to help entrepreneurs understand the computation of taxes and therefore for the purpose of simplicity, only broad concepts have been explained.

Karan Batra is a Chartered Accountant and is currenly a Visiting Faculty at Institute of Chartered Accountants of India (Delhi branch). He is trying to simplifying taxes for the common man through his blog i.e. www.charteredclub.com