Income Tax and TDS Computation on Contract Based Employee

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.

Categories TDS

8 thoughts on “Income Tax and TDS Computation on Contract Based Employee”

  1. I am working in a private company on contract and are paid fixed sum for which tax is deducted based on normal tax slabs also form 16 is being issued. I filed the tax last year on 100% earned amount as I was not aware that contractual employees need to file tax only for 50 percent of amount and need to fill ITR4. Is form 16A necessary as the company issues form 16 only.

  2. I am working on contract basis and TDS deducted under Sec.194J. Also, I got gratuity and some payment from my earlier employer, PSU, which was paid before Finance bill for gratuity came and TDS was deducted under 192. Which ITR form to be filed ?

  3. I am Deepak
    I was working on lecture basis from April to June 2018. From July onwards I am working on contract basis. I’m paid Rs 40000 per month on contract.
    If I consider my earnings from gross earnings is RS 460000(from April to March 2019) Request guide calculate Tax on income.

  4. I am a Deputy Manager working in a Company in Accounts and TAxtaion department. My TDS is cut u/s 194C. which ITR I shall File..??? Also my Sister is earning income on contract based employee. shes Assistant Professor. Which ITR shall she file..???

  5. I am working as temperory faculty in a Engineering institute. My consolidated salary is 70000. The institute cuts 10% of my salary as TDS. So, i get 63000 in hand. My institute has submittes the TDS under 194J. Now i have two questions,
    1. I have a total salary of 8,40,000.Out of which i need to pay tax only of half the salary i.e. 4,20,000. Out of which 2,50,000 is exempted. So i only need to pay tax for remaining 1,70,000. Which will be 8500 for the year at the rate of 5%. Am i right????
    2. Is form 16A is compulsory for applying ITR???

  6. I am working as a lecturer on contract basis in government polytechnic. I am getting salary as a consolidated pay. TDS is not deducted in our salary. Only PT is deducted. Without knowledge i have filed ITR1 for the financial years 2015-16 and 2016-17. Which ITR form should I file this financial year 2017-18 ?

  7. I am an engineer of 61 years age retired from an automobile company. Presently I am working on contract. Please let me know what amount of my contract amount will be taxable. Will I get the benefit of section 44ADA assuming my taxable income as 50% of total income & pay income tax accordingly.
    Please confirm.
    Regards
    S.K.Garg

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