Structuring your contract as a consultant

A significant difference in being onboard a company as an employee versus a consultant is that in the case of the former, your receipts are classified as income from salary” while as a consultant the income is classified as “income from business or profession”. Since all your tax benefits, deductions and exemptions are based on this classification, and it is crucial to understand the pros and cons:

Pros of an agreement/contract as a consultant:

  1. Lower TDS Rate: As a salaried person, your TDS is deducted based on the tax slab. On the other hand, as a consultant, you pay a TDS at the standard rate of 10%. The only catch is that, as a consultant, you have to be careful about paying your advance taxes on time to avoid the accumulation of interest on the said amount. 

  2. Optimise Tax Outgo: As a consultant, you get the distinct advantage of balancing your income and expenses to minimise your total tax payments. How? Unlike salaried professionals, you are eligible to claim the expenses incurred during the course of your professional work and services. These are treated as ‘expense from the income earned’ for tax purposes.

Tax deductions on professional expenditures: You can also claim other business-related expenditures. Do you pay rent for an office you have on a lease? Count it in. On the same lines, account for telephone expenses, conveyance expenses, depreciation on furniture, computer etc. as deductions while filing your ITRs.

  1. Pros of a salaried employee contract

  2. Tax benefits and deductions: As a salaried professional, you are in receipt of tax benefits like House Rent Allowance (HRA), Leave Travel Allowance (LTA), conveyance allowance etc. 

  3. Benefits by the employer: One of the most striking bits of a consultant contract is that you are stripped off many salaried benefits like health insurance, fund contributions etc. 

  4. Retirement benefits: Retirement benefits like Gratuity, PF, leave encashment etc. are available only to salaried employees. As consultants, the entire onus of retirement planning falls on you alone.

    Apart from this, a few other parameters differentiate between the two alternatives: 

  5. GST registration may be needed in the case of a consultant contract; the same is not required for a salaried professional.

  6. A consultancy agreement may require you to maintain books of accounts and undergo a tax audit exercise if the gross receipts are greater than ₹50 lakhs; none of this applies to a salaried employee.