Salaried employees have always complained about receiving salary after high deduction of income-tax while professionals are able to claim all sort of expenses and offer only the net profit to taxes. Hence, there is a growing tendency of salaried employees wanting to become independent consultants to avoid coughing up huge amounts as taxes. Before you take any such decision, it is better to do a reality check of all the implications of becoming a
consultant
vis-a-vis an employee.
The fees earned from professional or technical services rendered by a taxpayer is classified as income from business or profession, whereas in case of employment, income earned is classified as salary income.
A
salaried employee
is eligible to claim
tax
deduction on certain components of the salary income such as leave travel allowance, house rent allowance and leave encashment. However, a standard deduction of Rs 40,000 has been introduced in Union Budget 2018 in lieu of exemption provided for conveyance allowance and medical expense reimbursement.
A consultant, cannot claim deduction on the above components that are paid to the salaried employees. However, they are eligible to claim business expenditure incurred in providing their professional services as an expense from the income earned for tax purposes.
A consultant may even claim expenditure such as rental payment of leased office, telephone expenses, conveyance expenses, and depreciation on assets like air conditioner, furniture, computer, phones and other business assets used for providing professional services.
For salaried employees, the employer is required to deduct taxes every month at an average rate of tax applicable to the employees which may go up to maximum of 35.88%. However, for professionals, the company deducts the tax at a flat rate of 10% from the consultancy fee at the time of payment.
A consultant is required to pay advance tax if the taxes deducted fall short of the actual tax liability. The advance tax is required to be paid in four instalments. The first instalment has to be paid by June 15th , the second September 15th , the third by December 15th and the fourth by March 15th. A salaried employee, on other hand, is not required to pay advance tax if he has no other income apart from salary.
Salaried employees have to mandatorily contribute to provident fund whereas consultants need not make any such contribution.
A consultant is required to maintain books of accounts to account for the expenditures claimed in a proper format that can be reasonably verified by the tax department. This needs to be supported by necessary documents for a specified number of years. Then there is also a requirement of getting the books of accounts audited by a practicing chartered accountant wherever the gross receipt of the professional exceed the specified limit. The same, however, is not applicable for a salaried employee.
Preeti Sharma is director and Shivam Seth, is manager, People Advisory Service, EY.
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