Do you work as an individual, or are you an employee? Are you a contract professional, or are you on a retainer ship contract? Whatever your nature of employment, do you fill out form 16 or Form 16 A to file your income tax? It is vital to know the type and nature of your job for filing an income tax return.
Nature of Employment Meaning
People in any work must always be aware of their nature of employment because it will help them file their ITR correctly. If you are withdrawing a certain amount as salary, you could be a salaried employee or you can also be a contract employee.
Therefore, it is vital to know the nature of your employment for filing income tax in the correct form. The nature of employment in ITR helps you add values and contributions to the right category. The quality and nature of work is the determining factor for categorising the income of any individual. It can be a daily task that can be part of a daily or even a non-routine job.
Categories of Nature of Employment and the Difference Between Them
There are two broad categories of nature of employment:
1- Salaried Employees
2- Contract Professionals
Income tax clearly distinguishes between a salaried employee and a contacted professional. Salaried employees file ITR through form 16, whereas the contacted professionals fill for 16 A.
Types of Salaried Employee:
1- Government Employees: For income tax purposes, Government employees are employed by either central Government or State Government or any PSU in which the Government owns majority shareholding as per the law.
2- Other Employees: Other than the Government or private sector employees, come under this category.
For Income tax purposes, pension is treated as salary.
Let’s look into some more points of difference:
Duration of Contract:
Duration or period of employment determines your income tax return form. Words like ‘retainer ship’ and ‘professional services’ clarify this difference.
Structure of Pay and Pay Slip:
Salaried employees’ pay structure is properly bifurcated, usually as Basic, DA, Bonus, HRA, and likes. It may also include deductions like provided funds (PF), food allowance, etc. Usually, the salary contains the total amount paid for contracted professionals. TDS is the only deduction as per the nature of employment in ITR.
An employee’s payslip will show the detailed breakup of the gross and net salary, that is, in-hand salary. The company hires a contracted professional for a specific period so that the salary slip will contain ‘Professional fees paid.’
Salaried employees will file their ITR under section 203 of the IT act by filling out form 16. There is a low amount of tax deductions and refunds. The contracted employees have higher IT deductions because there are deductions in their salary slips to claim reimbursement. However, they can apply for a refund showing deductions as business expenses.
Loan Application and Insurance Cover:
A person filing income tax returns under form 16 always gets a faster and hassle-free loan than someone filing ITR through form 16 A. There is no assurance of the regular income of the contracted employee because the company can terminate the contract at any time. Similarly, the insurance cover on a salaried employee is more than a hired professional.
What is ITR 1?
The income tax department of India divides taxpayers into different groups depending on their income and source. One such group is ITR 1, also known as ‘Sahaj Form.’
So, who can file a return through ITR 1?
A person having income from the following source can fill out a simplified one-page ITR 1 and file their income tax return:
- Income from salary or pension
- Income from one house property, excluding cases carrying forward the loss or losses of previous years
- Income from other sources, excluding income from racehorses and lottery
Who cannot file a return under ITR 1?
- With income above Rupees 50 lakes
- With any unlisted shares during the financial year
- Holding the position as a director in a company
- Who is residents not ordinarily resident (RNOR) or non-residents
- With signing authority in any account outside India or who is resident
- Calming relief of foreign tax paid or double taxation relief under sections 90/90A/91
- With income through the following sources:
– Lottery, racehorses, gambling, etc.
– More than one house property
– Short term and long term taxable capital gains
– Income from agriculture exceeding rupees 5,000
– Business or profession
Nature of Employment in ITR 1 for Software Engineers
Government employees, PSU employees, pensioners, and others fall into the nature of employment in ITR. Hence, checkbox ‘others’ for nature of employment in ITR 1 for software engineers.
Job holders can call their monthly income ‘salary’ because it is generic. Still, always be aware of your nature of employment for income tax purposes because the income tax department differentiates between the salary of a salaried person and that of a contracted professional. Though both derive salary and fill income tax returns, one will file a return through form 16, and the other will fill form 16 A.