Future Generali

Consultant vs Salaried Employee: Key taxation differences for you

An increasing number of millennials in India is choosing to freelance or work as a consultant instead of working as a salaried employee. By 2020, half of our working population is expected to start freelancing. In a quest for work-life balance, consulting is emerging as a lucrative option. However, one key factor to be taken into account while deciding whether to work on payroll or to consult is income tax. Here are the key points of difference:

    • Taxability: Tax on salary is levied on net income which is derived after deducting exemptions like house rent allowance, leave travel allowance, children’s education allowance, standard deduction, etc. For the independent professional, taxable income is derived after reducing all business-related expenses from gross receipts.
    • Maintenance of books: A salaried taxpayer need not maintain any books of accounts. Their employer issues Form 16 which has details of income, exemptions, and taxes. However, tax for consultants in India is calculated on the basis of books of accounts maintained by them. If the gross receipts exceed ₹50 lakhs, these books must be audited too.
    • Advance Tax: Most of the tax liable for a salaried person is deducted at source by the employer. There is little need for advance taxes. But tax for consultants in India has to include advance taxes, if the estimated tax liability is more than ₹10,000 after reducing TDS. Interest is charged for non-payment of advance taxes.
    • Filing of Income Tax Returns: Returns for tax on salary are generally filed in ITR1 if the total income does not exceed ₹50 lakhs. Return of tax for consultants in India is generally filed in ITR 3. In case of presumptive scheme of tax, it can be filed in ITR4.
    • Carrying forward of losses: A salaried person does not have profits or losses. However, a consultant does. Professional losses determined as per law can be set off against heads of income other than salary. Unsettled losses can be carried forward to future years as well. This can reduce the taxable income.
    • Retirement benefits: Salaried employees can build a retirement corpus through EPF contribution. They can claim it as a deduction under Section 80C of the Income Tax Act. Consultants do not have this privilege. They have to plan, save, and invest on their own. However, consultants can consider investing in retirement-focused ULIPs that is also exempted under section 80C. Moreover, ULIPs come under the Exempt-Exempt-Exempt tag regime.
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