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.
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”.
However, there are a few key points of differences to be taken into account while deciding whether to work on payroll or to consult is income tax. They are as follows:
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.
The income received as fees from professional or technical services rendered is classified as income from business or profession in case of consultant, whereas in case of employment, amount paid by employer to employee, 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.
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 applicable to professionals which is currently 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.
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.
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.
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. Under the Exempt-Exempt-Exempt (EEE) tax regime, wherein certain investment instruments allow for all three components to be exempted from taxation.
- Under this, the first exempt indicates that the investment amount is eligible for deductions.
- The second exempt is meant to indicate that any interest or returns earned during the period of investment is exempt from taxation.
- The third exempt is meant to specify that at the end of the investment period, the entire amount that is withdrawn by the investor is also exempt from taxation.
To summarize, it is always advisable to analyze thoroughly the pros and cons for each of the two options before you opt one over the other.