Are you an employee or consultant? Your income tax deductions depend on it

One of my friends is a dentist and has joined a private hospital. The hospital owner deposits his remuneration every month into his bank account. On submitting his proof for investments for section 80C, he is told that my friend is being treated as a consultant, not a regular employee. Since his tax liability comes lower than the tax being deducted, he also requested the hospital to deduct lower tax for the next three months, which the hospital has refused, saying that they can’t reduce the amount of tax to be deducted and tax will be deducted for the next three months as deducted in the past. What should he do now?

A professional can either work as an employee or as a consultant for an organisation, including a hospital. The method of computing tax to be deducted as an employee is quite different than that of a consultant.

In the case of an employee, the employer projects the taxable salary to be paid to the employee during the year and computes the tax liability after considering various deductions available to him depending on which tax regime he has opted for. Once the tentative annual tax liability is determined, the same is deducted in equal parts in all the months. This exercise is carried out every month to consider any revision in his emoluments in subsequent months, other income reported by the employee, and proof of various claims he submitted.

Tax deduction laws for employees and consultants are different

If the employer finds that a higher or lower tax is being deducted than what is required, the employer can revise the tax to be deducted accordingly. Therefore, the amount of tax to be deducted from salary will not be the same for all months. However, if the person is retained as a consultant, the organisation employing him has to deduct tax at the rate of 2% of the amount being paid.

While computing the amount of tax to be deducted from the salary paid to the employee, the employer is bound to take into account various deductions for which the employee is eligible based on the documents submitted by him. In case you are retained as a consultant, the organisation paying the consultancy charges is not supposed to take into account such deductions while computing the amount to be deducted.

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Balwant Jain is a tax and investment expert and can be reached at [email protected] and on @jainbalwant on social media platform X (formerly Twitter)

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