poor contractor tax filing ready reckoner

Form I – ‘other income’ clause exploit

As I have been self employed since 1994, my only option was to fill up the Income Tax Return Form IV which I did in 2009-10. However things have become a lot easier in 2010-11. This is what I do:

• Sum (Add up) all the deposits in my no frills savings bank account’s quarterly statement, repeat for 4 statements of the year. If your bank doesn’t provide you a statement; just add up all the deposits from your PassBook and never deposit cash.
• Add the interest earned for the year from the saving bank account statement.
• Show the amount as ‘Other Income’ in the Form I.
• Subtract Term Life Insurance Premium Paid as Tax exemption under Section 80G, might not apply for unit linked insurance plan policy.

As most Indian contractors earn less than the taxable limit this should suffice. If you live in a small town walk into the Income tax office and file the return manually at no cost! If you are earning more than Indian rupees One lac including interest earned, I suggest the use of One credit card to pay all your bills, this saves you time and tracks your expenses which the tax consultant can put to use immediately if you are liable to pay taxes. General rule of thumb is don’t deposit, withdraw or handle cash, try to spend all the money earned using the credit card thereby having an immediately accessible expense trail. I have gifted add-on credit card to my Ammai and Tandai, which they use diligently to buy groceries, additionally have signed up for the Auto-Pay option for most household utility bills.

Disclaimer: Am not qualified to comment to Indian Tax Laws, refer Income Tax Department for current details.

Form IV as individual self employed

Keep your financial/business entity as individual – self employed.

Declare the money paid to contractors as ad hock contractor payment. Get Tax deduction Account Number. Deduct tax at source for monthly amount paid greater than Indian Rupees Nineteen thousand only/-.  Else tell your contractors to submit a Form 15, which states that their taxable income is below income tax limits and thereby tax should not be deducted at source. Your contractors need to submit two copies of [signed] invoices to you with their income tax permanent account number mentioned on the top right of the invoice. You are to counter sign a copy of their invoice and send them back One copy, use India Post® Indian rupees 5 envelope. I suggest you hire Indian contractors only and make payments through your bank account using real time gross settlement / national electronic funds transfer, avoid PayPal®, then collect a receipt. To file income tax returns IV last year I used Tax Spanner, and received the Dividend Warrant against Form 16 deducted Tax at Source which was pending for work completed for Illumine Knowledge Resources. As long as your taxable income is less than 5 lacs, all is well! Above 5 lacs a service tax liability kicks in I think; which would warrant a Tax information network registration. Remember the worst case scenario is that you would pay around 30% of all deposits into your bank account as income tax. Therefore, never register a company or buy a car, for tax reasons alone. The optimal tax savings instrument is Reserve Bank of India 2003 Tax Free Savings Bonds [Sovereign Guaranteed] as the principal and interest earned are not taxable; available to resident citizens of republic of India, in Indian Rupees 1000 denomination and multiples thereof.

Caveat: Your memory is inversely proportional to your wealth. Think of it as Saraswati vacating premises for Lakshmi!