With the advent of globalization, many organizations now hire their workforce on contract basis. This means that the hired person is not a full-time employee of the company, rather the person is hired with a view to complete a certain task and then would be released or re-hired by the company later on. Income Tax on Contract based Employee/Consultant is computed in a different manner. Here we find that the hired employees are neither entitled to HRA (House Rent Allowance) or other benefits such as Leave Travel Allowance, Pension, etc.
How to file ITR for Income Tax on Contract based Employee/Consultant?
People who generate their income from contract-based employment should file their returns in ITR Form 4 or ITR Form 4S. As these people are not employees and they do not have employer- employee relationship, they cannot file their income tax returns in ITR 1/ ITR 2 as their source of income does not qualifies under the head ‘Income from Salaries’. The correct head under which income tax for Contract based employees needs to be filed is ‘Income from Business or Profession’.
Computation of TDS
The TDS is being deducted on the salary of employees. Employees claim TDS under Section 192. But in the current scenario, TDS cannot be deducted under section 192 as these people are not employees so it is deducted under Section 194J or 194H or 194D. TDS is generally deducted @ 10% in these cases. These provisions allow a tax payer to deal with situations where the nature of employment is on contractual basis and the hiring company has deducted TDS.
Form 16 is not issued to contract based employees as these are not regular employees. These type of contract based employees would be issued Form 16A. The TDS deducted can be verified easily be the employee in Form 26AS. It can also be downloaded online.
Computation of Income Tax on Contract based Employee/Consultant
By now, it must have become clear that a taxpayer needs to show his income under the head ‘Income from Business or Profession’, if his source of income is from employment on contractual basis. Now we shall see how we can compute his taxable income.
Total Payment Received – Total expenses incurred for income = Taxable Income
In the above-mentioned calculation, the term total payment received reflects the sum total amount received by the tax payer in the course of his contractual employment. The term total expenses incurred reflects the expenses which was borne by the person in connection to his employment i.e. expenses incurred to earn that income (no other expenses such as personal expenses are allowed to be deducted). This includes cost of transportation, cost of telephone bills, cost of lunch, etc. The remaining amount will become taxable under the head ‘Income from Business or Profession.
The taxable income as computed will be taxable as per the income tax slab rate.
Alternative way of computing taxable income- Applicable from FY 2016-17
The income of contract based employees are treated as business income so they are required to maintain all books of accounts. But that is very difficult for contract based employees to maintain books of accounts. The IT Department has tried its level best to simplify the whole scenario by way of introducing presumptive scheme of taxation. In this case, the person need not maintain any books of account or comply with various other norms which is applicable under the normal taxation route. As per section 44ADA, the tax payer can simply assume his taxable income to be 50% of total income and pay taxes accordingly. The introduction has been made from 2016 onwards and can be used from the Financial Year 2016-17. As the tax is paid on the half of the income not on the entire income, the tax burden on the contract based employees is reduced. This provision allows tax payers to showcase his taxable income as 50% of his total income and get rid of following the traditional norms.
Thus, we find that Income Tax on Contract based Employee/Consultant can now be easily computed and the process of taxation being simplified. Have questions? Feel free to use the comment section and we shall be glad to answer them for you.