Regular salary vs consultancy: Here's how the tax treatment differs

Nowadays, many of us prefer to work independently as a consultant or freelance than being associated with full time with an organization, being on their payroll. This is because of the enormous flexibility one gets to have by being self-employed. However, it is equally important to understand that flexibility cannot be the sole determining factor to choose self-employment over being salaried. Financial and tax compliance plays a significant role in deciding which option is more suitable for you. These have been discussed in this article.

Taxability

First and foremost, it is important that one understands that a salaried individual gets taxed differently from a professional consultant. If you are salaried, you can offer income from salary after claiming various exemptions like House Rent Allowance, Leave Travel Allowance, Children’s Education Allowance, Standard Deduction etc. The net salary income will be taxable under the head “Income from salary”. An independent professional determines his taxable income by reducing all business-related expenses from his gross receipts. His net income will be chargeable under the head “Profits and Gains from Business or Profession”. However, the rate of income tax payable on both would be one that is applicable to the income slab the taxpayer falls under.

Income tax compliance

Irrespective of you being a salaried individual or a consultant, you would be subject to certain compliances under the income tax laws. However, the nature of compliance differs for each of these two cases. Some of these are :

a. Maintenance of books

There is no requirement for a salaried taxpayer to maintain any sort of book of accounts to reflect his income from salary. In fact, the employer, immediately after closure of a financial year, issues a statement called the Form 16 which comprises details of the taxpayer’s income and all the exemptions he has claimed during the year and also details of taxes already deducted on the salary income.

However, the law mandates that if you are a professional, you must maintain books of accounts. Further, if your gross receipts exceed Rs 50 lakhs, the law requires that you must get your books audited too. Not doing so could have penal consequences

b. Advance tax

Most of the tax liability, for a salaried individual, in most cases, is taken care of by the employer by way of tax deduction at source. Hence, the need for such a taxpayer to discharge advance taxes is generally remote.

A professional, however, who estimates a tax liability of more than Rs 10,000 after reducing tax deducted at source if any, is bound to pay advance taxes. Else, he will be liable for interest for non-payment of such taxes.

c. Filing of income tax return

A salaried individual generally files his return of income in ITR 1 provided his total income does not exceed Rs 50 lakhs. Further, the due date prescribed under law for filing his return is 31 July of the relevant assessment year.

An independent professional can file his return of income in ITR 3. In case he opts for the presumptive scheme of tax, he can file the much simpler ITR 4. Further, if the individual is not subject to an income tax audit, he must file his return on or before 31 July of the assessment year. Otherwise, 30 September of the assessment year is the due date prescribed.

d. Carry forward of losses

A salaried individual, for obvious reasons, would not any losses under this head which he can set off against other income in order then he can bring down his taxable income.

However, an independent professional can suffer losses. The professional losses so determined as per the provisions of law can be set off against other heads of income except for salary and unset off losses can be carried forward to future years too for set off. This facility to set off losses helps the taxpayer bring down his taxable income and therefore his tax liability also comes down.

Retirement benefits

Most companies insist that employees contribute towards the Employees Provident Fund month on month and an equal percentage is contributed by the employers too. This, in turn, helps the employee build a retirement corpus as also helps them claim such contribution as a deduction under Section 80C.

Professionals do not enjoy this benefit. They will have to independently plan and save to help them sail smoothly through their retirement days

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.

(Author is the founder & CEO of ClearTax)