Be On Salary Or Be A Consultant? Know The Tax Implications

There is a growing inclination towards working as a self-employed professional or a freelancer. The reason being this is the flexibility and independence that one gets while working as a professional. Many private sector employers give their candidates the option of working as a consultant or as an employee. Many a time, this works best for both the employer and the employee. However, before choosing between the two paths, you must carefully analyse their respective tax implications. Type of income, taxability Income received from consultancy is termed as income from profits and gains of business or profession whereas income from employment is termed as salary income. A salaried employee can avail tax exemptions on various components of the salary. These include house rent allowance (HRA), leave travel allowance (LTA), conveyance allowance, children's education allowance, uniform Allowance, various reimbursements etc. However, in the case of a consultant, business expenses incurred in providing consultancy services are deducted from the consultancy income for tax purposes. These include telephone bill, internet bill, vehicle fuel expenses, commuting expenses if related to work etc. Additionally, depreciation on assets like AC, furniture, computer, phones and other business assets used for providing services can also be claimed as deduction from taxable income. A consultant is not entitled to any bonus, gratuity, provident fund or pension. On the other hand, an employee receives these benefits. Books of account, audit A salaried employee is not required to maintain books of account or get his or her accounts audited by a chartered accountant (CA). In fact, employers maintain the income records for their salaried employees in the form of Form 16 which contains details like salary received, exemptions, deductions, tax paid and payable etc. Specified professionals - such as lawyers, doctors, engineers, architects and other professionals - whose income or the gross receipts exceed the specified amount, maintenance of regular books of accounts along with a record of the work-related expenses is mandatory. These records and the books of account need to be maintained for 4-6 years after filing the return. Moreover, consultants, whose gross receipts from consultancy income exceeds Rs 25 lakh, are required to get their accounts audited by a chartered accountant. Benefits under new Section 44ADA of Income Tax Act The Finance Bill, 2016 has provided for a special provision for computing profits and gains of the profession on the presumptive basis with effect from April 1, 2017. A consultant can opt for this scheme if his or her total receipts in one financial year are Rs 50 lakh or less. By opting for this scheme, their taxable income will reduce to half, which is not possible in case of salaried individuals. This scheme will reduce their compliance burden, and they will not be required to keep detailed accounting records. Consultants can file income tax return form ITR-4 (old ITR-4S) - which is a much simpler form - instead of ITR-3 (old ITR-4) - which is a relatively bulky form. Carry forward, adjustment of loss An employee can set off only house property loss against employment income. On the other hand, a consultant can set off losses of another business (for example, share trading) from consultancy income and carry forward unabsorbed losses for eight succeeding years. This is a huge benefit for a consultant since this considerably reduces taxable income and hence taxes. Advance tax In case of a salaried employee, income tax is calculated and deducted by the employer every month as per the tax rate applicable to the employee. When it comes to consultancy, compensation payment is received post-TDS, which is at a flat rate of 10 per cent from consultancy fee. A salaried employee is not required to pay advance tax provided he or she has no income other than salary. A consultant, however, needs to pay advance taxes. TDS is only an interim measure, and therefore, the actual tax liability has to be estimated beforehand. In case the expected annual tax liability is much higher than TDS, that balance tax needs to be paid by way of advance tax at designated bank branches in four instalments as under (except in the case of assessee opting for presumptive taxation): . First By June 15 15% Second By September 15 45% Third By December 15 75% Fourth By March 15 100% .(Chetan Chandak, Head of Tax research, H&R Block India).Disclaimer: The opinions expressed within this article are the personal opinions of the author. The facts and opinions appearing in the article do not reflect the views of NDTV and NDTV does not assume any responsibility or liability for the same.

Be On Salary Or Be A Consultant? Know The Tax Implications

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