Even though consultants do not have the same benefits as employees, tax is deducted at source up to 10.3%. There is a long list of expenses that can be deducted also. Consultants whose income exceeds Rs.10 lakh have to be audited by a CA.
Companies have now started hiring employees on a contract basis and though they work in the office premises, their legal status is not the same as an employee. They work on a contract or a consultant basis and they get a fixed amount of remuneration. They do not get HRA, LTA, leave encashment or pension, etc.
Consultant can claim depreciation on assets like AC, furniture, computer, phone or other business assets used to provide service. They are required to maintain accounts of expenditure that can be ascertained by the tax department. The documents are to be maintained for a specified number of years.
If the income on the gross receipt exceeds a specified amount, the books of account is to be audited by a CA. Company deducts a flat 10% tax from the consultant’s fee at the time of payment. Consultant has to pay advance tax at designated bank branches in 3 instalments. The first instalment is to be paid by 15th September, second by 15th December and third by 15th March. Consultant must comply with the service tax regulations if the services he or she provides are included in the notified services.
Many people prefer working as a consultant as they get to take home a high income and have a low income tax liability. They like the benefit of holding a lump-sum amount without any deductions. The consultant bills the company for the services rendered and get paid in lump sum and only 10.3% tax is deducted at source.
Expenses that can be deducted are as follows:
- If the consultant works from home, rent of space
- Commuting if it is related to work
- Vehicle fuel expenses
- Equipment maintenance
- Telephone and internet bill
- Stationery charges
- Cost of cell phone
- Car loan interest
- Courier and mail service
- Books and newspapers
- Vehicle insurance
- Sweeper, peon or driver’s salary
- Depreciation is allowed on vehicle and office equipment
If the consultant buys a computer, car or a phone, his taxable income goes down. Any furniture that the consultant uses to work on is considered as permissible expense. However the consultant will not get exemption for house rent. He also does not get medical allowance or leave travel assistance.
The company does not provide PF and if the consultant is not planning for his or her retirement, he or she could face a lot of trouble after retirement. Consultant is required to maintain a record of the work related expenses incurred for up to 8 years after filing the return. Consultant’s whose income exceeds Rs.10 lakh must get their expenses audited by a chartered accountant. Consultant trades off less tax for more paperwork. The highest tax charged for a consultant is 11.33% which includes the educational cess whereas an employee can get charged 33.99% as the highest tax.
Consultant’s whose annual income does not exceed Rs.20,000 will not be taxed. The gross consultancy fee is deducted by rent for office, telephone, conveyance expense, repair and maintenance, depreciation of vehicle for business use, depreciation on compute, photocopies, printers etc. The net income is taxable under the professional income.
Consultant must be aware if the services he or she renders attracts service tax which is charged at 12.36% on the consultancy fee.
The pros of being a consultant is that you can work independently, organise and manage the resources and are not required to be at office. But you will be trading in a job security and the comfort of regular income. Consultancy arrangement attracts risk associated with an independent enterprise.