Are you considering shifting from an employment arrangement with your company to a ‘consultant’ status to lower tax outgo leading to higher take-home package?
As consultants you are required to pay a flat 10 percent tax on income while an employee is taxed as per applicable slab, the highest being 30 per cent along with surcharge.
The dilemma of whether to take up the ‘consultant’ status bothers many, especially at the time of taking up a new employment. “A shift to a consultant status can be availed if a person is eligible for the presumptive scheme (of taxation) or can manage proper records. Otherwise, it may not work well as any resultant tax gain may get offset by the time and efforts involved in such exercise,” Amit Maheshwari, Partner, Ashok Maheshwary & Associates told Moneycontrol.
Under Income Tax Act certain eligible professions (such as legal, medical accountancy and architect) can avail the presumptive scheme (up to Rs 50 lakhs of annual fee) where 50% of the fee is treated as taxable income leading to lesser tax liability. Those not in these specified professions can still have lower tax liability by maintaining proper books of accounts, bills, receipts, etc. to claim the expenses on actual basis.
Sudhir Kaushik co-founder and CFO, Taxspanner, lists out five advantages of having a consultant status:
Lower TDS rate: Tax on salary income is deducted as per tax slab whereas professional consultants have fixed 10% deduction. However, interest on tax would be payable if there is any additional tax payable at the time of filing return.
Flexibility in income and expenses for tax optimization: The cost-to-company (CTC) structures in some companies are not tax-efficient and flexible in spite of ample opportunities in the tax laws for tax optimization. Companies also play safe on fear of IT department notice for clarification/proof submission later.
Ease of availing tax benefits: Companies, such as those in the IT sector, have tax-efficient CTC which employees do not utilize fully. For example, car lease required three years job commitment, while the employee always has job change in mind. However, a consultant can easily avail benefits provided on interest on a car loan, insurance, petrol and driver as a business expense.
Not dependent on an employer for significant deductions: A consultant can invest 20% of their income in National Pension System (NPS) to save tax without any approval. However, NPS deduction on employer contribution is not available till employer implements the scheme. Similarly, HRA, LTA, Medical reimbursement, gratuity, superannuation, leave encashment, term cover, food coupon car lease, driver, phone bill, ESOP, etc. are tax optimization components for salaried but corporate has to provide as part of CTC. Otherwise, the employee can not avail tax benefits through these options. Moreover, the window of availing these benefits is very limited during the year or career.
Flexibility in working time, projects and clients: In the case of salaried employee the working hours and projects are almost fixed. Consultants have flexibility which helps in taking a risk in other projects for faster growth and higher income. In the case of loss, the project loss can be adjusted to another project income.
However, Amit Maheshwari points out that ‘consultant’ status can come with some disadvantages too. These include:
Lack of long term benefits: Certain company policies like gratuity, retirement benefits, etc. may not be concretely designed for consultants.
Additional compliance requirements: Shifting to consultancy arrangement may not also lead to increased compliances such as service tax, the audit of accounts by a Chartered Accountant and observing other deadlines like advance tax payments which usually are not required under employment arrangement. Also, the employer may reject the proposal of consultancy arrangement, if it is not able to take credit for Service Tax paid to such person.
“The consultant can intimate the concerned company and shift to employment status. However, in such circumstance he or she will need to surrender registration of service tax or any such registration taken during the consultancy arrangement,” says Maheshwari.
Whether you are a Consultant or an Employed individual, you should know how to optimize your taxes and keep your tax outgo at minimum.Optimize Tax Now!
Also published here