Taxation for Contractual Employees and Freelancers

There is often a certain level of confusion when it comes to contractual employees to file their returns. Do they show their income under head salaries or show under some other head?

So income under head salaried is recorded only when there is an employer-employee contract. TDS for the same is deducted u/s 192. However, in the case of contractual employees and freelancers, there is no employer-employee agreement. It usually comes under the ambit of professional services and TDS for the same is deducted u/s 194J. One should ensure that the employer is deducting the TDS under the correct section as it can create a mismatch in the classification of income under ITR and 26AS.

The services rendered by a professional are taxed u/h PGBP i.e. Profits and Gains from Business and Profession. In the case of salaried employees, ITR 1 is filed, and in case of PGBP income, ITR3/ITR4 is filed (based on turnover).

Taxation for Contractual Employees and Freelancers

Case 1- Annual Gross receipts under 50,00,000 and profit equal or more than 50% of the turnover.

Under this scenario, the individual is eligible for presumptive taxation u/s 44ADA. Following professions are eligible for the section-

  1. Legal
  2. Medical
  3. Engineering or architectural
  4. Accountancy
  5. Technical consultancy
  6. Interior decoration
  7. Movie artists include a producer, editor, actor, director, music director, art director, dance director, cameraman, singer, lyricist, story writer, screenplay or dialogue writer and costume designers
  8. Representing another person for a fee before a tribunal or any authority constituted under any law

Under the section, the gross amount received by the individual is considered as turnover. The assessee is then eligible to deduct expenses to compute the Income from Profession. Such income should not be less than 50% of the gross turnover. (Exception explained in next case)

In case the scheme is opted for, the individual is also not required to maintain books of accounts as u/s 44AA.

The individual is required to file ITR-4 under the given scenario.

Case 2- Annual Gross receipts under 50,00,000 and profit less than 50% of the turnover

If the gross turnover does not exceed 50,00,000 and the profits are below 50% of the gross turnover, then the individual gets liable for maintaining books u/s 44AA and tax audit u/s 44AB. Hence it is advisable to opt for normal provisions under such a scenario.

Case 3- Annual Gross receipts exceed INR 50,00,000

The individual would be required to compute the income as per the normal provisions of income tax (Section 28- 43C). Accounts are required to be audited u/s 44AB if the turnover exceeds INR 1,00,00,000. However, if less than 5% transactions are cash transactions, the limit for the tax audit is INR 5,00,00,000.

In the given scenario, the individual is required to file ITR-3.

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