- Income received as a full-time / part-time consultant is taxed under âProfits and losses from a business or professionâ and not under âSalariesâ.
- Consultants must pay business tax in accordance with the requirements of state tax laws
- Consultants are authorized to claim expenses incurred on an actual basis in the course of their work which are not of a personal nature.
New Delhi: Some people join the same company or another company as consultants after they retire. Likewise, others work as freelancers. There is confusion over how consultants / freelancers are taxed. Let’s try to clear up the confusion in this article.
How fees are taxed and allowable expenses on this income
Many people who have continued in the same company but as a consultant, after reaching retirement age, have the idea that, since they are working full time in the same company, their income is taxable under the Salaries section. Which is not correct. Income received as a full-time / part-time consultant is taxed under âProfits and losses from a business or professionâ and not under âSalariesâ.
Companies stop paying and deducting contributions to the contingency fund from the amount paid to consultants. It also does not deduct business tax, but you may need to register under business tax laws and pay business tax, unless you are exempt from the requirement under your state law. In addition, tax is levied by your former employer at the flat rate of 10% (7.50% currently due to the Covid-19 measure announced by the government) and you may have to pay withholding tax in case the amount of TDS would not be enough to offload you. your tax payable.
An employee is entitled to a standard deduction of up to 50,000 / – to cover the expenses you have incurred to earn your salary income without having to present supporting documents. No similar deduction is available for a consultant or a freelance on the income received. However, as a consultant, you are entitled to claim expenses incurred on an actual basis in the course of your work which are not of a personal nature. These expenses usually include things like internet expenses, mobile expenses, printing and stationery, transportation costs, etc. attributable to your activity as a consultant after removing personal use items, if any. You can also deduct a very small portion of the house’s rent (if the house is rented) and electricity expenses on the house. You are also allowed to claim depreciation on the computer and printer used for your work. In addition to depreciation, you can also claim money spent on repairs and maintenance of computers and printers. The expenses listed are enumerative and you can claim any other expenses if you can establish that they were incurred for your work as a consultant.
The net of professional charges levied on incurred expenses is taxable under âoperating profits and gains and gainsâ. If you have other income like rent, interest, dividends, capital gains, etc., they are taxed under their respective headings. Income under all headings is added together. There is no difference in the tax rates of an employee’s income compared to that of a freelance writer or consultant.
Can you opt for a flat tax regime?
Tax laws allow certain specified professionals to offer 50% or more of their gross business income as net profit for tax purposes. In order to be eligible for such a flat tax, your gross receipts must not exceed an amount of 50 lakhs per year. It should be noted that any person carrying out a consultant or self-employed activity is not eligible to opt for flat-rate taxation. For example, only accountants, architects, some film artists, lawyers, doctors, engineers, etc. may opt for such a scheme while people like insurance advisers, mutual fund distributors, investment advisers, journalists, etc. are not eligible to opt. for such a flat-rate taxation. In my opinion, if your actual profits are more than 50% of your gross income, you should offer a much higher percentage as income as a consultant. In the event that you claim that your actual expenses are greater than 50% of your business income, you are required to have your accounts audited and submit this report to the income tax department.
Possibility of going to the lower tax brackets
You can opt for the new tax reduction regime but you will not be able to claim any deduction under Chapter VIA as under Article 80 C, 80CCD, 80D, 80GG 80TTA etc. However, if you opt for the old plan, you can claim all of these deductions. Once you have opted for the new reduced rate regime, you will not be able to revert to the old tax regime unless you stop practicing as a consultant and have no taxable income from profits and profession business gains.
(The author is a tax and investment expert and can be contacted on [email protected] and @jainbalwant on Twitter.)
Balwant Jain is a guest contributor. The opinions expressed are personal.