Regular salary vs consultancy: Here's how the tax treatment differs
Business Standard: 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.
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 :
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 BS
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