THE REAL TAX MATH AND LEGAL PITFALLS OF CHOOSING TO WORK AS A CONSULTANT

Many employees believe they will be financially better off working as consultants than staying on payroll, due to perceived tax savings. But how accurate is this belief, and what risks arise if an employee is reclassified as a consultant?

- GAUTAM NAYAK

Consultant payments attract a flat 10% TDS, while employee taxes are deducted based on taxable salary. However, consultants must still file returns and pay any tax difference on their actual income. Consultants can opt for the presumptive taxation scheme, where income is presumed as a percentage of gross receipts—50% for specified professions and 6% for others. If income declared meets or exceeds these thresholds, tax officers usually do not question the expenses claimed.

A common misconception is that only the prescribed percentage of gross fees is taxable. This is wrong. The law refers to the prescribed percentage or any higher actual income earned. Thus, one cannot declare only 6% of ₹70 lakh (₹4.2 lakh) as income while also claiming investments of ₹30 lakh from that income. What is taxable is either the actual income earned—reflected in spending on assets and personal expenses—or 6% of gross fees, whichever is higher.