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If you are working as a contract employee, filing your Income Tax Return is not optional. Unlike regular salaried employees, contract workers often face confusion regarding which ITR form to use, how TDS is handled and whether they are eligible for deductions. Knowing the correct process helps avoid notices, ensures timely refunds and keeps your compliance record clean. This guide will help you understand the basics of ITR filing for contract employees in a practical and simplified way.
Latest updates
- ITR filing Due date for FY 2024-25 (2025-26) has been extended from 31st July 2025 to 15th September 2025
Who are Contract employees?
Contract employees are individuals who work for a company on a contractual basis rather than being hired as permanent employees. Unlike full-time employees, contract workers are typically engaged for a specific project, duration or task. Their employment terms, including the length of the contract, scope of work and compensation, are outlined in a contract agreement between the individual and the employer.
Contract employees may work full-time or part-time, and they may receive benefits such as paid time off or healthcare depending on the terms of their contract. This arrangement provides flexibility for both employers and employees, allowing companies to hire specialized talent for short-term projects while enabling individuals to pursue diverse opportunities and maintain a flexible work schedule.
Income tax For Contract employees
Income tax for contract employees depends on the nature of their agreement with the company. If the contract is in the nature of employment, the income is taxed under the head “Salary” and the employer deducts TDS under Section 192. However, if the contract is for providing specific services without being on the company’s payroll, the income is treated as “Income from Profession” or “Other Sources”, and TDS is usually deducted under Section 194J or 194C. In such cases, the contract employee may need to maintain books of account and may also be eligible to file under the presumptive taxation scheme (Section 44ADA or 44AB depending on turnover). Understanding your contract terms is important to determine how your income will be taxed and what deductions or benefits you can claim.
Income from contract work is taxable under which head?
Income from contract work is generally taxable under the head “Profits and Gains of Business or Profession” under the Income Tax Act, 1961. This applies when the individual or entity is engaged in contract-based activities such as construction, consultancy, freelancing, or other service-based work as part of their business or profession. The income earned is treated as business income, allowing for deductions of expenses incurred in the course of earning such income.
TDS on contractual employees under section 194C
TDS on contractual employees under Section 194C applies when a person is hired to carry out any work, including supply of labour, under a contract that is not in the nature of employment. This section is applicable to payments made to contractors and sub-contractors for carrying out work such as construction, catering, transport, or other service-based contracts. When payment is made to contract employee TDS is deducted at 1%. If PAN is not provided then TDS is deducted at 20%. TDS under Section 194C is applicable only if the single payment exceeds Rs 30,000 or the total payments in a financial year exceed Rs 1 lakh.
TDS on contractual employees under section 194J
TDS on contractual employees under Section 194J applies when the services provided are of professional or technical nature such as consultancy, accounting, legal, engineering or similar services. This section is relevant when the individual is not under an employer-employee relationship but is working independently on a contract for service. The payer is required to deduct TDS at the rate of 10% if the total payment during the financial year exceeds Rs 30,000 (Increased to Rs. 50,000 from FY 25-26 onwards). It is important for the service provider to furnish their PAN, otherwise TDS will be deducted at 20%.
What are Deductions and exemptions available to Contract employees?
- Section 80C Deductions: Contract employees can claim deductions under Section 80C for investments made in specified instruments such as Public Provident Fund (PPF), Equity Linked Savings Scheme (ELSS), National Savings Certificate (NSC), etc. The maximum deduction allowed under this section is Rs. 1.5 lakh per financial year.
- Section 80D Deductions: Contract employees can claim deductions for premiums paid towards health insurance policies for themselves, their spouse, children, and parents under Section 80D. Additionally, deductions for preventive health check-ups are also available.
- Section 80E Deductions: If a contract employee has taken an education loan for higher studies, they can claim deductions on the interest paid on such loans under Section 80E. This deduction is available for a maximum of 8 years or until the interest is fully repaid, whichever is earlier.
- Section 80TTA/80TTB Deductions: Contract employees can claim deductions on the interest earned on savings account deposits (up to Rs. 10,000) under Section 80TTA. For senior citizens, deductions on interest income from savings accounts, fixed deposits, etc., can be claimed under Section 80TTB (up to Rs. 50,000).
- Home Loan Interest Deduction: If a contract employee has taken a home loan, they can claim deductions on the interest paid on the loan under Section 24(b) of the Income Tax Act. The maximum deduction allowed is Rs. 2 lakh for self-occupied properties.
- Business Expenses: Contract employees can also claim deductions for business-related expenses incurred in the course of their professional activities. This includes expenses such as office rent, utilities, travel, communication, professional development courses and any other expenses directly related to their contract work. Keeping detailed records of these expenses is crucial to substantiate claims and minimize tax liability.
- Depreciation: If Contract employees use assets such as computers, office furniture, or vehicles for their contract work, they can claim depreciation on these assets as a deductible expense.
Income tax Slab rates for Contract employees
Old tax Regime
| Income | Tax rates |
| Upto ₹ 2.50 lakh | 0% |
| ₹ 2.50 lakh – ₹ 5 lakh | 5% |
| ₹ 5 lakh – ₹ 10 lakh | 20% |
| Above ₹ 10 lakh | 30% |
You Can claim deduction under Section 80C, 80D, 80G, etc
For senior citizen (age between 60 & 80 years), tax rate is 0% upto ₹ 3 lakhs. Rest of the rates are same.
For super senior citizen (age above 80 years), tax rate is 0% upto ₹ 5 lakhs. Rest of the rates are same.
In Old tax regime, a maximum tax rebate under section 87A of Rs. 12,500 is available for income upto Rs. 5 lakhs meaning your income is totally tax free till Rs. 5 lakhs. The rebate under section 87A is not allowed to a Non-resident.
New tax Regime (FY 23-24)
| Income | Tax rates |
| Upto ₹ 3 lakh | 0% |
| ₹ 3 lakh – ₹ 6 lakh | 5% |
| ₹ 6 lakh – ₹ 9 lakh | 10% |
| ₹ 9 lakh – ₹ 12 lakh | 15% |
| ₹ 12 lakh – ₹ 15 lakh | 20% |
| More than ₹ 15 lakh | 30% |
New tax Regime (FY 24-25)
Income | Tax Rate |
Upto ₹ 3 lakh | 0% |
₹ 3 lakh – ₹ 7 lakh | 5% |
₹ 7 lakh – ₹ 10 lakh | 10% |
₹ 10 lakh – ₹ 12 lakh | 15% |
₹ 12 lakh – ₹ 15 lakh | 20% |
Above ₹ 15 lakh | 30% |
New tax Regime (FY 25-26)
| Income Range (₹) | Tax Rate |
|---|---|
| Upto ₹ 4 lakh | Nil |
| ₹ 4 lakh – ₹ 8 lakh | 5% |
| ₹ 8 lakh – ₹ 12 lakh | 10% |
| ₹ 12 lakh – ₹ 16 lakh | 15% |
| ₹ 20 lakh – ₹ 20 lakh | 20% |
| ₹ 20 lakh – ₹ 24 lakh | 25% |
| Above ₹ 24 lakh | 30% |
Which ITR form is applicable for contract employees?
Contract employees should file their Income Tax Returns using either Form ITR-3 or ITR-4, depending on their specific circumstances. If a contract employee has income from business or profession and wishes to claim actual expenses or has income from sources like capital gains or rental income, ITR-3 is applicable.
If the contract employee opts for the presumptive taxation scheme under Section 44ADA (for professionals with gross receipts up to ₹50 lakh) or 44AD (for business with turnover up to ₹2 crore), then ITR-4 should be used. They are not eligible to file ITR-1 or ITR-2, as their income is not taxed under the “Salary” head but under “Profits and Gains from Business or Profession”
Benefits of ITR Filing for Contractual Employees
Helps claim TDS refunds if excess tax has been deducted
Enables easy access to loans, credit cards and term insurance
Acts as valid income proof for visa or government tender
Carries forward certain losses (like business loss) to future years for set-off
Builds a consistent financial record.
Useful for applying for government subsidies or schemes where income proof is required
Documents required for ITR filing for Contract employees
Form 16A: For contract employees, you might receive Form 16A for TDS deducted on payments other than salary. This can be alternatively checked using 26AS.
Bank Statements
Investment Proofs: If you’ve made any investments eligible for tax deductions under Section 80C such as PPF, ELSS or life insurance premiums, keep the proofs handy.
Other Income Proofs: Gather documents supporting any other sources of income like rental agreements, consulting contracts or project-based income.
- 26AS and AIS
Process of ITR filing for contract employees
Login to Portal
Go to www.incometax.gov.in/iec/foportal/ and log in using your PAN and password.Go to ‘File Income Tax Return’
On the dashboard, click on ‘e-File’ > ‘Income Tax Return’ > ‘File Income Tax Return’.Assessment Year Selection
Choose the relevant Assessment Year (e.g., for FY 2024-25, the AY is 2025-26) and click Continue.Select Mode of Filing
Choose Online Mode for easier step-by-step guidance and click Proceed.Select Status
Choose your status as Individual and click Continue.Select ITR Form
If your income is under professional contract (not salary), choose ITR-3 or ITR-4 depending on your case:
Pre-fill and Validate
The portal will fetch pre-filled data from Form 26AS, AIS, and TIS. Verify the income details, especially under:Salary (if contract treated as employment)
Income from Profession (if fees received for service contract)
TDS and Advance Tax paid
Claim Deductions
Under Chapter VI-A, claim deductions like Section 80C (LIC, PPF), 80D (Mediclaim), 80TTA, etc.Compute Total Tax Liability
The portal auto-calculates tax. Verify the calculation. If tax is payable, pay it via e-Pay Tax option.Submit and e-Verify
Once all details are verified and tax is paid (if required), click Submit.
Complete the process with e-Verification through Aadhaar OTP, Net banking, or other available options.Acknowledgement
Download and save the ITR-V acknowledgement after successful filing.
Due date of ITR filing for contract employees
The Due date to file Income tax return for FY 2024-2025 (AY 2025-2026) is 31st July,2025 which is extended to 15 th September, 2025.
In case you miss this deadline then you can file belated ITR till 31st December, 2025 with late fees.
Also for any mistake made while filing ITR before due date, you can make corrections by filing Revised ITR any number of times till 31st December, 2025
If you miss deadline of Belated income tax return filing then you can file Updated ITR (ITR U) till 4 years from the end of relevant assessment year with late fees and additional taxes.
What happens if ITR is not filed?
Late filing fee up to Rs 5,000 under Section 234F
Interest at 1 percent per month on pending tax under Section 234A
Refund cannot be claimed if return is not filed
Business and capital losses cannot be carried forward
May receive income tax notice for non-compliance
Cannot revise return later if original return is not filed
Difficulty in getting loans, insurance or visa
Penal consequences in case of willful default or tax evasion
Looking for help?
At A R Dhorajiya & Co., we specialize in income tax return filing for contract employees. From choosing the right ITR form to optimizing deductions under Section 44ADA or 44AD, we ensure complete compliance with minimal effort on your part.
Contact us today at +91 9769647582 for a consultation or to get started with your ITR filing
Frequently Asked Questions
Login to the income tax portal, choose the appropriate ITR form (ITR-3 or ITR-4), fill in income details, claim deductions, pay tax if applicable and submit the return. E-verify the ITR to complete the process.
Yes, income tax is applicable based on total taxable income, even for contract employees. Tax liability depends on income earned and applicable slab rates.
Form 16A is a TDS certificate issued for income other than salary. It shows the amount paid and tax deducted under sections like 194J or 194C for contractual payments.
TDS is deducted under Section 194C if the payment exceeds Rs 30,000 for a single invoice or Rs 1,00,000 in aggregate in a financial year.
Calculate total income from all sources, reduce eligible deductions (like 80C, 80D) and apply the applicable slab rate to compute tax. Add surcharge and cess if applicable.
Contract employees are taxed as per individual slab rates applicable under the old or new tax regime, based on the total taxable income.
No, salary slips are not usually given unless the contract is treated as employment. In case of professional or service contracts, invoices and payment vouchers are used.
If a contractor (individual) is paid Rs 50,000 for a job, TDS under Section 194C is 1 percent. So, deduct Rs 500 as TDS and pay Rs 49,500. Deposit TDS with the government and issue Form 16A.
Login to the income tax portal and view Form 26AS or Annual Information Statement (AIS). It will show all TDS entries against your PAN.
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