You have got an offer from a company to either join as an employee or a consultant. Before you decide, know the tax implications between the two options as they differ significantly.
The income received as fees from professional or technical services rendered is classified as income from business or profession, whereas in case of employment, it 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.
A consultant on the other hand cannot claim deduction on these perquisites that are available to the salaried employees. However, all eligible business expenditure incurred in providing consultancy services can be deducted from the consultancy income for tax purposes. A consultant can even claim depreciation on assets like AC, furniture, computer, phones and other business assets used for providing services.
Consultants are however required to maintain accounts of these expenditures in such a fashion that it can be reasonably ascertained by the tax department. They are also required to maintain the necessary documents for a specified number of years.
Also, where the income or the gross receipts exceed a specified amount, books of accounts are to be audited by a chartered accountant. These special requirements of maintaining the books of accounts and getting them audited are not applicable to salaried employees.
In case of salaried employees, tax is withheld by the employer every month at an average rate applicable to them. But for professionals, the company deducts the tax at a flat rate of 10 per cent from the consultancy fee at the time of payment.
A salaried employee is not required to pay advance tax if he has no income other than salary. A consultant, however, needs to pay advance taxes at designated bank branches in three instalments. The first instalment has to be paid by September 15, the second by December 15 and the third by March 15.
A consultant also has to be mindful of the service tax. If the services provided are included under the notified services, there is a need to comply with service tax regulations.
The income received as fees from professional or technical services rendered is classified as income from business or profession, whereas in case of employment, it 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.
A consultant on the other hand cannot claim deduction on these perquisites that are available to the salaried employees. However, all eligible business expenditure incurred in providing consultancy services can be deducted from the consultancy income for tax purposes. A consultant can even claim depreciation on assets like AC, furniture, computer, phones and other business assets used for providing services.
Consultants are however required to maintain accounts of these expenditures in such a fashion that it can be reasonably ascertained by the tax department. They are also required to maintain the necessary documents for a specified number of years.
Also, where the income or the gross receipts exceed a specified amount, books of accounts are to be audited by a chartered accountant. These special requirements of maintaining the books of accounts and getting them audited are not applicable to salaried employees.
In case of salaried employees, tax is withheld by the employer every month at an average rate applicable to them. But for professionals, the company deducts the tax at a flat rate of 10 per cent from the consultancy fee at the time of payment.
A salaried employee is not required to pay advance tax if he has no income other than salary. A consultant, however, needs to pay advance taxes at designated bank branches in three instalments. The first instalment has to be paid by September 15, the second by December 15 and the third by March 15.
A consultant also has to be mindful of the service tax. If the services provided are included under the notified services, there is a need to comply with service tax regulations.
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