Income tax liability for contract employee working for US client

I'm working as full time employee for an Indian company. I'm going to work as contract employee for a US company from next month leaving my present company. I'll setup a small personal office (for which I'll get reimbursed every month for all expenses). They will wire me salary every month.

How do I calculate my tax liability and deductions?  I fall under 30% tax bracket. As a permanent employee I had different deductions (eg., HRA, conveyance etc) to save tax. What are tax savings options do I have as contractor? Am I going to pay more taxes as contractor than as regular employee? If I have clear understanding of my tax liabilities then I can negotiate payment terms to cover high tax payout
Asked 1 year ago in Income Tax from Bangalore, Karnataka
The basic questions that need to be answered are (1) your status as Resident /Non Resident and (2) your relationship with the employer.

If you are working from India, you will be resident and you will be liable for tax on your global income, including the income earned in USA. You can claim double taxation relief, if you had to pay taxes in USA also. 

If your relationship with the US company is that of Employer and Employees, you will be still assessed under the head : Salaries. The tax situation will be the same, except changes in the emoluments. However, tax has to be deducted by the US company.

If your relationship with the US Company is that of a service provider as a professional, your income will be assessed under the head: Income from business or profession. In such case, all reasonable expenses incurred in connection with the earning of your professional income will be allowed as deduction in computing your taxable income. You will be able to claim deduction on account of depreciation on your assets employed in your profession, such as Laptops, Mobile, vehicle. The other expenses like travelling and conveyance to the extent they are not reimbursed by your firm/client can also be claimed. In addition regular expenses such as your expenditure on books, vehicle maintenance and communication expenses can also be claimed.

If your professional income exceeds Rs 25 L, then your accounts will have to be audited by a CA.
B Vijaya Kumar
CA, Hyderabad
290 Answers
5.0 on 5.0
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As you are working from India, you will be resident under the IT Act and you will be liable to pay tax on your global income. In your case, the income earned from providing services to the US company can be treated as export of your services, unless you provide on site support services also. You need to have IE (Import-Export code) also to get the money credited to your bank account. 

Are you a contractor or a professional? Whether you are a contractor or professional, your income will be assessed under the head Income from Business/Profession. 

Yes, you can claim deduction for all the reasonable expenses incurred in connection with your business/profession, including rent.

You can have salary income for the first half of this FY and business/professional income for the second half. You can have both incomes simultaneously also-no issue. You will get deduction of all expenses from the date you actually commence business operations and all such expenses in connection with the setting up of your business will be allowed only subject to fulfillment of certain conditions specified in the IT Act. 

You may set up your business as a proprietary concern or as a partnership concern or as a company. If its a proprietary concern, your business income will be assessed in your individual capacity. If it is a partnership or a company, the income will be assessed in the hands of the partnership firm /company, as the case may be. Only the income you get from such firm/company will be assessed in your hands. You can have proper tax planning to suit your needs.
B Vijaya Kumar
CA, Hyderabad
290 Answers
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U can also claim 80D benefit for mediclaim
U can claim 80G benefit in case of donations made to specified institutions.
U can claim 80U & 80 DD benefits in case of any disablity(personal) or medical expenses on disability of relative.
U can claim 80GG deduction for rent paid
Shashank Surana
CA, Chennai
60 Answers
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Dear Sir,

On the basis of your questions my observations are following :

- Your income shall be treated as your business income and you will be allowed all expenses incurred by you for running and maintaining your office.
- Your income shall be taxed in India only and you need to pay tax here with Indian tax authorities.
- You will also eligible for all legal deduction like, lic, ppf, tution fees of childrent, mediclaim, house rent etc.
- You will have much more flexibility on tax saving as you can claim many expenditure against your business income. So your total tax liability will reduce as contractor.

- You need to file income tax return for the current year claiming both - salary income and business income in your return and it will not prevent you from any tax claims.

Please feel free to ask any other questions or detailed tax planning with accurate figures if you want. we can also work out various legal ways to reduce your tax burden from current structure.
Vishrut Rajesh Shah
CA, Ahmedabad
231 Answers
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