tomwedding
New member
Why this topic is important:
This topic is being covered due to existence of presumptive taxation schemes under Indian Income Tax. For our discussion, section 44ADA under the presumptive taxation scheme is relevant.
As per section 44ADA, a notified professional(covers IT professionals) is allowed to claim 50% of his/her revenue as expenses without having to maintain books of accounts. In other words, the taxpayer will not have to prove his/her expenses and can still claim to have incurred upto 50% of revenue as expenses. This is a benefit exclusive to professionals earning less than 75 lakhs per annum in revenue.( For Financial year 2023-24)
Relevance of 50% expenses through an example:
If an independent contractor is earning 40lakhs per annum from a foreign entity, his/her taxable income will be considered as 20lakhs (50% of 40lakhs).
Let’s compare that to a salaried person with CTC of Rs. 40 lakhs.
Typically, the basic salary component will be 35% of the basic salary (Rs. 14 lakhs) and HRA will be 40% of the basic salary ie Rs.5,60,000. Rent paid by such person will be around 5 lakhs per annum.
This gives us an HRA deduction of Rs. 3.6 lakhs per annum. There is also the standard deduction of Rs. 50000.
Let’s assume that you also get perquisites such as books and periodicals, food stamps, laptops to reduce your taxable salary by another Rs.60000.
Lastly, let’s assume that your employer contributes 12% of your salary ie 12% of (basic salary+HRA+perks) ie . Rs. 2,42,000 to the Provident fund.
There are also certain deductions available to everyone under old tax regime under sections 80C, 80CCD(1B), 80D and 80TTA. On an average, a person is able to claim a deduction of Rs. 2,30,000 under these provisions. These are known as “Chapter-VI” deductions.
This is how your taxable income will look in this scenario:
https://preview.redd.it/t795ujge47f...bp&s=26bbd516c2a0edd6802b9dd66c31457328ff716d
Current regime vs Old regime
Going for old regime DOES NOT MAKE SENSE FOR CONTRACTORS in most cases. The occasional scenario where it might make sense is when you have a pre-construction interest of Rs. 5 lakhs or more on a self occupied house. Rest of the scenarios where opting for old scheme would make sense are far and in between.
On the other hand, an employee who is eligible to claim an HRA deduction of Rs. 1,50,000 or more will benefit from opting for old regime for FY 2023-24. THIS MAY CHANGE IN FUTURE YEARS.
An exception to this rule would be a salaried person whose total income during the year is not greater than Rs. 7.75 lakhs for the year(2023-24). In that case, it is beneficial for the tax payer to opt for new regime and pay zero tax.
Table showing computation of taxable salary
I have created a table showing the calculation of Taxable salary as per Old regime.
Here are the necessary assumptions:
Table showing taxes saved by independent contractors
Based on above table, we can calculate the difference in tax payable by a contractor v that payable by a salaried person, assuming there is no other source of income. But, if there is other income, it will largely affect the calculation due to difference in tax rates in old vs new scheme and NOT because of any difference in deductions.
Table showing taxes saved by independent contractors
Notes: The deductions taken for second slab of under 10 lakhs is Rs. 234000 instead of the average Rs. 230000 because it saves the taxpayer Rs. 13.5k in taxes. It is assumed that the taxpayer will figure out a way to increase the deductions(or reduce income by 4k) to offset the marginal tax.
Table showing lump sum corpus after 5 years if the amount was invested in Nifty Index funds.
Here are the necessary assumptions for understanding the table:
And that is all for this post. In clear monetary terms, it is better to be a contractor IF you can. Another benefit not discussed here is that employers offer Cars/vehicles to employees which add a mere Rs. 10000/year to the income of the employee, while such facility is NOT available to a contractor.
Thank you for reading through. I love you too.
This topic is being covered due to existence of presumptive taxation schemes under Indian Income Tax. For our discussion, section 44ADA under the presumptive taxation scheme is relevant.
As per section 44ADA, a notified professional(covers IT professionals) is allowed to claim 50% of his/her revenue as expenses without having to maintain books of accounts. In other words, the taxpayer will not have to prove his/her expenses and can still claim to have incurred upto 50% of revenue as expenses. This is a benefit exclusive to professionals earning less than 75 lakhs per annum in revenue.( For Financial year 2023-24)
Relevance of 50% expenses through an example:
If an independent contractor is earning 40lakhs per annum from a foreign entity, his/her taxable income will be considered as 20lakhs (50% of 40lakhs).
Let’s compare that to a salaried person with CTC of Rs. 40 lakhs.
Typically, the basic salary component will be 35% of the basic salary (Rs. 14 lakhs) and HRA will be 40% of the basic salary ie Rs.5,60,000. Rent paid by such person will be around 5 lakhs per annum.
This gives us an HRA deduction of Rs. 3.6 lakhs per annum. There is also the standard deduction of Rs. 50000.
Let’s assume that you also get perquisites such as books and periodicals, food stamps, laptops to reduce your taxable salary by another Rs.60000.
Lastly, let’s assume that your employer contributes 12% of your salary ie 12% of (basic salary+HRA+perks) ie . Rs. 2,42,000 to the Provident fund.
There are also certain deductions available to everyone under old tax regime under sections 80C, 80CCD(1B), 80D and 80TTA. On an average, a person is able to claim a deduction of Rs. 2,30,000 under these provisions. These are known as “Chapter-VI” deductions.
This is how your taxable income will look in this scenario:
https://preview.redd.it/t795ujge47f...bp&s=26bbd516c2a0edd6802b9dd66c31457328ff716d
Current regime vs Old regime
Going for old regime DOES NOT MAKE SENSE FOR CONTRACTORS in most cases. The occasional scenario where it might make sense is when you have a pre-construction interest of Rs. 5 lakhs or more on a self occupied house. Rest of the scenarios where opting for old scheme would make sense are far and in between.
On the other hand, an employee who is eligible to claim an HRA deduction of Rs. 1,50,000 or more will benefit from opting for old regime for FY 2023-24. THIS MAY CHANGE IN FUTURE YEARS.
An exception to this rule would be a salaried person whose total income during the year is not greater than Rs. 7.75 lakhs for the year(2023-24). In that case, it is beneficial for the tax payer to opt for new regime and pay zero tax.
Table showing computation of taxable salary
I have created a table showing the calculation of Taxable salary as per Old regime.
Here are the necessary assumptions:
- The rent paid is Rs. 15k/month till CTC of Rs. 10 lakhs, Rs. 25k/month for CTC between Rs. 10 to 20 lakhs and Rs. 40k above CTC of Rs. 20 lakhs.
- Basic salary is 35% of CTC and HRA is 40% of CTC and an additional deductions ie available for tax free perks amounting to Rs. 60000.
- Employer is contributing 12% of (Basic + HRA + Perks) as contribution to Provident fund.
- The salaried taxpayer is able to utilise the deductions under Chapter-VI( 80C,80D,80CCD(1B) and 80TTA) upto an average amount of Rs. 2.3L
Table showing taxes saved by independent contractors
Based on above table, we can calculate the difference in tax payable by a contractor v that payable by a salaried person, assuming there is no other source of income. But, if there is other income, it will largely affect the calculation due to difference in tax rates in old vs new scheme and NOT because of any difference in deductions.
Table showing taxes saved by independent contractors
Notes: The deductions taken for second slab of under 10 lakhs is Rs. 234000 instead of the average Rs. 230000 because it saves the taxpayer Rs. 13.5k in taxes. It is assumed that the taxpayer will figure out a way to increase the deductions(or reduce income by 4k) to offset the marginal tax.
Table showing lump sum corpus after 5 years if the amount was invested in Nifty Index funds.
Here are the necessary assumptions for understanding the table:
- It is assumed that the same tax benefit is going to accrue at end of each year. There is no increment.
- The fund is estimated to be invested in Index funds growing at a rate of 12% per annum.
And that is all for this post. In clear monetary terms, it is better to be a contractor IF you can. Another benefit not discussed here is that employers offer Cars/vehicles to employees which add a mere Rs. 10000/year to the income of the employee, while such facility is NOT available to a contractor.
Thank you for reading through. I love you too.