It is possible that a person might have worked with a particular organization as an employee for part of the financial year and as a consultant for the remaining part of the financial year.
For example, say for April to December 2007 the person has worked as an employee with the Company X and subsequently he left the employment and worked as an independent consultant with the same company.
Therefore, an issue arises how should the income received from the same organisation (here Company X) in different roles (first as an employee and then as a consultant) should be taken into account for filing the tax return?
The income received by an individual as an employee from Company X would be liable to tax under the head Salary Income. In respect of salary income, the employer is required to estimate the total salary income and deducted tax (TDS) as per applicable rates.
Generally, the entire tax required to be paid by an individual on his salary income is withheld by the employer. Therefore, broadly speaking, no further tax would be required to be paid by the individual in respect of his salary income.
In respect of the consultancy income received by the individual from Company X, the same is taxable under the head Profits and Gains of Business or Profession. The Company X is required to deduct tax at the prescribed rates on the consultancy income paid to the individual.
The consultancy income received by the individual should be considered as gross receipts and the individual shall be eligible to deduct expenditure incurred by him to earn such consultancy income eg, transportation costs, telephone and electricity charges, etc. The net income (ie, gross receipts less expenditure) is liable to tax.
In the instant case, in respect of consultancy income, the individual is required to pay advance tax on specified dates after taking into credit the tax deducted at source by the Company X as per the provisions of the Income Tax Act, 1961.
The individuals salary income and consultancy income would be added to arrive at his total income. Tax would then be computed on the total income. From such tax, the tax deducted on salary and TDS on consultancy income would be adjusted (reduced). Also, any advance tax paid by an individual, on his consultancy income, would also be adjusted (reduced) from the tax payable.
Finally, if there is any balance tax payable (ie total tax liability less tax deducted by company X on salary income and consultancy income and advance tax paid by the individual) then the same has to be deposited with the tax authorities before filing the tax return, along with interest, if any.