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Salaried employee vs.

consultant: Know
the tax implications
Written by Surajit Dasgupta | Last Updated: April 27, 2014 13:39 (IST)
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4COMMENTS

You have got an offer from a company to either join as an employee or a consultant.
Before you decide, know the tax implications between the two options as they differ
significantly.
The income received as fees from professional or technical services rendered is
classified as income from business or profession, whereas in case of employment, it is
considered as salary income. A salaried employee can claim tax deduction on certain
components of the salary such as house rent allowance, leave travel allowance,
conveyance allowance and uniform allowance.
A consultant on the other hand cannot claim deduction on these perquisites that are
available to the salaried employees. However, all eligible business expenditure incurred
in providing consultancy services can be deducted from the consultancy income for tax
purposes. A consultant can even claim depreciation on assets like AC, furniture,
computer, phones and other business assets used for providing services.

Consultants are however required to maintain accounts of these expenditures in such a


fashion that it can be reasonably ascertained by the tax department. They are also
required to maintain the necessary documents for a specified number of years.
Also, where the income or the gross receipts exceed a specified amount, books of
accounts are to be audited by a chartered accountant. These special requirements of
maintaining the books of accounts and getting them audited are not applicable to
salaried employees.
In case of salaried employees, tax is withheld by the employer every month at an
average rate applicable to them. But for professionals, the company deducts the tax at a
flat rate of 10 per cent from the consultancy fee at the time of payment.
A salaried employee is not required to pay advance tax if he has no income other than
salary. A consultant, however, needs to pay advance taxes at designated bank
branches in three instalments. The first instalment has to be paid by September 15, the
second by December 15 and the third by March 15.
A consultant also has to be mindful of the service tax. If the services provided are
included under the notified services, there is a need to comply with service tax
regulations.
(Disclaimer: Investors are advised to make their own assessment before acting on the
information.)

Working as a consultant? Know your tax benefits


Vikas Vasal Jul 6, 2007, 01.07am IST

In the past, job security was of paramount importance for a salaried individual. In today's economic
scenario, however, this may not be entirely true. Increase in employment options, especially due to
scarcity of the requisite skill sets, has changed the whole scenario. Another change being witnessed in
today is that professionally/ technically qualified personnel prefer to work as independent consultants
rather than as regular employees.
This option provides them an opportunity to be their own masters /employers and work as per their free
will and convenience. Further, they are not bound by the office routine and also free to take up
assignments with other companies and pursue their other interests. It is also beneficial when it comes to
tax matters.

Employment versus independent job


Unlike an employment situation, which is governed by the terms of the employment contract, in case of
consultancy arrangement, the person works as an independent professional and takes up work on an
assignment basis as per the pre-agreed terms and conditions with the company.
Broadly, professional/technical services includes legal, medical, engineering, architectural, interior
decoration services and the services offered by professional accountants, technical consultants, etc.
Further, under an employment arrangement there is a master- servant relationship between the employer
and the employee while under a consultancy arrangement there is a principal-to-principal relationship
between the consultant and the company.
Tax perspective
Employment: Under an employment arrangement, the employer is required to estimate the annual salary
income of the employee and withhold tax as per the prevailing slab rates. The current highest slab rate of
tax is 30% plus surcharge and education cess (and the additional education cess). Therefore, the
effective highest tax rate is 33.99%.
If an individual has salary income only, then his entire tax liability is generally withheld by the employer
over the financial year. No tax is required to be withheld by the employer if the salary income does not
exceed Rs 1,10,000 in case of an individual, Rs 1,45,000 in case of women and Rs 1,95,000 in case of
senior citizen The employer is required to issue a withholding tax certificate at the end of the year. Based
on this certificate, the individual is required to file his personal tax return.
Consultancy: Under a consultancy arrangement, the company is required to withhold tax at the rate of
10% plus surcharge and education cess (and the proposed additional education cess). Therefore, the
effective highest tax rate could be 11.33%.
The company is required to issue a withholding tax certificate to the consultant. No tax is required to be
withheld if the consultancy fees do not exceed Rs 20,000 per annum.
Out of the gross consultancy fees received by the consultant, he can claim deduction for the expenses
incurred to earn such professional income. These include, rent and electricity of office premises,

telephone, conveyance expenses, repair running and maintenance, including depreciation of vehicles
used for business purposes, depreciation on assets like computers, photocopies, printers, etc.
Thus, the net income (gross receipts less all expenses) is taxable as professional income as profits and
gains of business or profession. In case the consultant is working as an individual (sole proprietor) the
said net income is taxable as per the slab rates applicable to individual tax payer. It is pertinent to note
that, in contrast to a consultant, a salaried individual is not entitled to any deduction for expenses like
depreciation on car, etc. from his salary income.
Caution on service tax
Another important factor to be kept in mind in case of consultancy arrangements is to examine whether
the services rendered by the consultant would attract service tax or not. If yes, then the consultant has to
charge service tax @ 12.36% on the consultancy fees.
The company paying the service tax to the consultant may avail credit for the service tax paid by it against
its own service tax liability. However, if the company's operations are such (say trading business) that it
cannot avail service tax credit then such service tax would result in an additional cost for the company.
Hence, levy of service tax by the consultant and eligibility to claim credit by the company are also
important factors to be considered before entering into any consultancy arrangement.
To sum up
Various factors like risk appetite, freedom to work independently, capability to organise and manage
resources, etc, should be considered while weighing the pros and cons of two options. While employment
provides job security, comfort and regular income, independent consultancy arrangements offer more
flexibility and independence; and may at times may be more tax effective. At the same time, consultancy
arrangement involves risks akin to those associated with any independent enterprise.

I work as a consultant. How much tax


do I have to pay?
Print Edition: November 1, 2007

I am working as a consultant in India for a US-based firm. I get


paid Rs 10 lakh a year without any tax deduction at source. How
much tax do I have to pay? Do I need to pay service tax in addition
to the regular income tax? Also, what expenses are tax deductible?
Prachi, Pune
Consultants are required to pay service tax in addition to income tax. In some
cases, they are exempt from service tax. For instance, the tax is not applicable
if the job is executed overseas or if the payment is in foreign currency. Your
income will be taxed at normal rates after deducting work-related expenses.
These may include:

Office rent
Telephone (mobile and landline)
Electricity
Newspapers and journals
Books
Office stationery
Mail and courier service
Travel and conveyance
Car fuel
Vehicle insurance
Salaries (assistant, peon, driver)
You can also claim depreciation on the written-down value of the following
items:

Office furniture
Office equipment (AC, computers, phones, cameras & other gadgets)
Vehicle

CALCULATING TAX LIABILITY

This list is not exhaustive. Usually all


the expenses incurred for carrying out
the business are deductible. Keep a
record of all these expenses. If these
expenses add up to, say, Rs 4 lakh, you
need to pay tax only on Rs 6 lakh.
If you invest in options specified under
Section 80C (PPF, insurance policies,
pension plans, tax saving funds, NSCs,
fixed deposits, school fees), deduct that
from the taxable amount (Rs 6 lakh in
this case). So, if you invest the
maximum Rs 1 lakh allowed, you will
need to pay tax only on Rs 5 lakh.

Annual income Tax rate

Your
tax

Up to Rs 1,45,000Nil

Nil

Rs 1,45,001 to Rs
10%
1,50,000

Rs 500

Rs 1,50,001 to Rs
20%
2,50,000

Rs
20,000

Above Rs
2,50,001

30%

Rs
75,000

Total tax
payable

Rs
95,500

There is also a 3% cess on the total


The above calculation is for women
tax payable
taxpayers. For men below 65 years, the
tax exemption threshold is a lower Rs
1,10,000. For senior citizens above 65 years, the threshold is Rs 1,95,000.
The income tax can be deposited along with the 3% cess at any designated
bank branch as advance tax in three instalments. The first instalment has to be
paid by 15 September, the second by 15 December and the third by 15 March.
The tax return has to be filed by 31 October. The new ITR-4 form has to be
used for filing your return.
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answer.