Freelance vs employee in a IT company: How income tax rules differ?

If a person is working as a regular employee, tax is required to be deducted by the employer from the salary if the employee’s taxable income exceeds the basic exemption limit for the year. However, no tax is deducted if there is not tax liability due to rebate available under Section 87A even if the taxable income exceeds the basic exemption limit. The aggregate tax payable for the year is required to be deducted over the year. For a person working as freelancer TDS provisions are different. 

The services rendered by a freelancer are generally treated as professional and technical services and TDS @10% is made on the payments in case the aggregate of the payments in a year is likely to exceed Rs. 30,000. So as long as the amount payable to you as freelancer does not exceed Rs. 30,000/- the TDS provisions do not apply. However once the threshold of 30,000 is crossed, tax will be deducted from whole of the amount paid during the year and not only from amount over Rs. 30,000/-. While deducting the tax the employer does not take into account the various deduction which you are eligible like those available under Section 80 C, 80D etc.

Please note that you will have to pay advance tax if your net tax liability after taking into account tax deducted by the company exceeds ten thousand rupees in a year. However, while computing your advance tax liability, you can take into account various deductions for which you are eligible. 

Balwant Jain is a tax and investment expert and can be reached on jainbalwant@gmail.com and @jainbalwant on Twitter.