Understanding TDS and Tax Benefits for Contractual Staff Under India’s New Tax Regime

New Tax Regime in India, introduced in 2020 and updated through subsequent Union Budgets, presents a new structure for calculating personal income tax. It offers reduced tax rates across income slabs but removes most traditional deductions and exemptions. This model has created a shift in how individuals, especially those working on a contractual basis, approach their tax planning.

Contractual staff, freelancers, gig professionals, and consultants now make up a significant portion of the workforce in India. These workers often operate outside formal payroll systems, receiving professional fees instead of monthly salaries. Their income is subject to Tax Deducted at Source (TDS), but their tax filing process differs from that of salaried employees.

Under the new tax regime, there is a need for careful assessment of benefits and liabilities. Many contract workers don’t have access to benefits like HRA or retirement fund contributions, which were previously used to reduce taxable income. As a result, the new regime’s structure may suit some professionals while being less effective for others.

Who Are Considered Contractual Staff?

Contractual workers include individuals who are hired for a specific period, task, or assignment. These professionals typically operate without formal employment contracts and do not fall under traditional HR benefits. Examples include:

• Freelancers or consultants
• Outsourced professionals or gig workers
• Individuals working on short-term assignments

Their payments are treated as professional fees or contractor payments, not salary. Consequently, TDS is applied under different provisions than those used for salaried employees.

TDS Provisions for Contractual Income

TDS on contract work in India generally falls under two main sections:

• Section 194J: Applies to professional or technical services. TDS is 10% if the total payment exceeds ₹30,000 in a financial year.
• Section 194C: Applies to contract services (non-professional). TDS is 1% (for individuals/HUFs) and 2% (for others) above ₹30,000 annually.

The payer deducts TDS before releasing payment and files it with the Income Tax Department. Contractual staff should ensure they receive Form 16A, which documents the TDS deducted.

Understanding Tax Liability Under the New Tax Regime

The new tax regime uses a reduced-rate slab system, which applies uniformly regardless of the source of income:

Income Slab (₹)	Tax Rate
0 – 3,00,000	Nil
3,00,001 – 6,00,000	5%
6,00,001 – 9,00,000	10%
9,00,001 – 12,00,000	15%
12,00,001 – 15,00,000	20%
Above 15,00,000	30%

However, under this regime, the following deductions are not permitted:

• Section 80C (investments in PPF, ELSS, LIC)
• Section 80D (health insurance premiums)
• HRA, LTA, standard deduction (₹50,000 was added later in FY 2023–24)

One benefit of the new regime is the Section 87A rebate, which continues to apply for income up to ₹7 lakh. In such cases, the effective tax becomes zero—even if TDS has already been deducted.

Business Expense Deductions Still Allowed

While the new tax regime restricts many personal deductions, contractual staff can still claim business expenses. If you file income under “Profits and Gains from Business or Profession”, you may deduct:

• Internet and phone bills used for work
• Software and digital tools
• Office rent or co-working space charges
• Travel for work purposes
• Professional certifications and learning costs

These are not deductions under 80C/80D, but valid business expenses under the Income Tax Act, which reduce your taxable profit before tax is calculated.

Filing ITR as Contractual Staff

Choosing the correct return form is important:

• ITR-3: For those who maintain books of accounts or have income from profession/business.
• ITR-4 (Sugam): For professionals opting for presumptive taxation under Section 44ADA (where 50% of receipts are treated as profit).

Under the new tax regime, presumptive income rules can still apply. However, once opted, a professional must continue with the same scheme for a fixed number of years unless switched under formal conditions.

Comparing the Old vs. New Tax Regime for Contractual Staff

Contractual professionals must choose between the old tax regime, which allows deductions, and the new regime, which offers lower rates with no deductions.

When the new regime might work better:

• You don’t claim deductions under 80C/80D/HRA.
• Your income is below ₹7 lakh (due to the rebate).
• You want fewer calculations and documentation.

When the old regime may be preferable:

• You invest in tax-saving instruments.
• You claim HRA or pay home loan interest.
• You have health insurance or other eligible deductions.

The Income Tax Department also allows employees and professionals to compare both regimes during ITR filing before making a choice.

Recordkeeping and Reconciliation Tips

• Keep invoices and payment proofs from clients.
• Track all business-related expenses with receipts.
• Download Form 26AS and AIS to reconcile TDS.
• Collect Form 16A for each TDS deduction made by clients.
• Consult a tax professional for quarterly advance tax planning, especially if your income is inconsistent.

New Tax Regime in India Impacts Contract Employees

The new tax regime has created a second path for income tax planning, which may appeal to those with limited deductions or predictable earnings. For contractual staff, freelancers, and consultants, understanding how TDS applies and how their income is classified plays a central role in estimating tax liability.

While the absence of exemptions may seem limiting, professionals still have options to reduce taxable income through business-related expense claims. Each person must assess their own earnings, deductions, and documentation capacity before choosing the tax regime that suits them best.

The key lies in knowing the difference between income tax and TDS, selecting the right filing approach, and keeping financial records in order throughout the year.