Will Switching to a Consultant Role with a ₹1 Crore Salary Save You Tax?

UV INDIA NEWS: Switching from an employee to a consultant role with an annual income of ₹ one crore might save tax, but several factors and conditions must be considered. As an employee, income is taxed under the 30% tax bracket with standard deductions, but a consultant can reduce taxable income through various business expenses.

Tax Scenario Comparison:

Employee: With a ₹1 crore salary, Sanjana, the example used, pays ₹29.25 lakh in tax after deductions for standard exemptions and employee benefits.

Consultant: When switching to a consulting role, Sanjana’s taxable income drops to ₹86.04 lakh due to allowable business expenses (e.g., rent, office setup, travel), and her tax liability reduces to ₹24.05 lakh.

Eligible Business Expenses for Consultants: Consultants can claim deductions for expenses directly related to their work, such as rent, utilities, communication, travel, and office maintenance. Specific costs like laptops and office furniture can be capitalised and depreciated over time.

GST and Compliance: Consultants with annual turnovers above ₹20 lakh must register for GST. Professionals can claim input tax credits on their GST returns for business-related expenses, which could offset their liabilities. However, consultants face increased compliance with monthly and quarterly GST filings, and the benefits of input credits are only realised if they strictly adhere to GST regulations.

Considerations for the Switch: The move from employment to consulting should factor in potential tax savings and the added responsibilities of managing business expenses, increased compliance work, and securing contracts from multiple clients to maintain independent contractor status.

Audit and Compliance Needs: Consultants must maintain detailed records of all expenses and income, and those with incomes exceeding ₹50 lakh annually must undergo tax audits by a chartered accountant. This adds another layer of administrative effort compared to being an employee.

Ultimately, while consultants can potentially reduce their tax burden through deductible expenses, they must weigh the benefits against compliance costs, administrative responsibilities, and the shift from a steady salary to variable income sources.