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18.  Salaried Employee or a Consultant ? — What the Tax Breaks Indicate

One important tax consideration between a salaried employee or a consultant is with reference to various tax-free perquisites which are available to salaried employees. For example, a salaried employee enjoys tax free benefits in the form of various cash allowances such as conveyance allowance, uniform allowance, transport allowance, etc., These allowances are fully exempted from income tax. Similarly, reimbursement received by salaried employee on account of medical expenses as also on account of leave travel assistance are tax free in the hands of the salaried employee.

Conversely, in the case of a consultant as he himself becomes the proprietor of his own consultancy firm he cannot pay any perquisite to himself. A consultant does not receive tax free allowances or perquisites as are available to the salaried employees. Thus, for a consultant, the expenses incurred by him towards medical expenditure for himself and his family as also towards going on a holiday and the expenses for his uniform will not be allowed as a deduction from his income from “consultancy”. A salaried employee also benefits as a result of rent free accommodation or house rent allowance granted by the employer. These benefits are not permissible to a consultant. Thus, a salaried employee enjoys innumerable tax free perquisites and allowances.

The next important key point in deciding whether to become a salaried employee or a. consultant is that the various expenses incurred by a salaried person cannot be- deducted from his salary income. A consultant however, enjoys, under the provisions of the Income tax Act, 1961, complete deduction in respect of various expenses which he incurs in earning the consultancy income. For example, if a motor car is maintained by a salaried employee he gets no deduction towards expenses incurred by him in running the car. But in the case of a consultant, the entire expenditure incurred on running and maintaining the motor car — including the expenses on the repairs or wear and tear of the motor vehicle — is allowed as a deduction. The motor car insurance premium paid, so also the petrol expenditure and the car driver’s salary are all allowed as a deduction from the income earned from consultancy. Apart from these expenditure the consultant also gets tax benefit of deduction towards depreciation allowance which is otherwise not available to a salaried employee. Similarly, if the consultant is running his consultancy profession from his residence, he can claim deduction in respect of the rent paid for the premises as also all the expenses incurred in carrying out the consultancy activity. A consultant is allowed deduction in respect of the employees and servants, etc. employed by him to run his consultancy organisation.

Similarly, all expenditure incurred by consultant whereas on payment of telephone expenses, internet connection expenses, entertainment expenditure, presentation articles as also commission, etc. are all allowed as deductions to him while computing his net income from consultancy.

After. going through the above discussion relating to various aspects of income tax connected with taxation of salaried employee as also the taxation of a person having consultancy income we come to the conclusion that for persons having income upto
` 5 lakh p.a., it is always better to join as an employee and not as a consultant. For those deriving income between ` 5 lakh and ` 10 lakh some saving of income tax is possible both as a salaried employee as well as a consultant because such a person can enjoy various tax free perquisites as an employee or, equally, enjoy various deductions for expenses from his income from consultancy. Hence, it would not make much difference for persons coming in this category because the impact of income tax can be less-ened in both the situations. However, a person drawing an income in excess of ` 5 lakh p.a. should, as far as possible, consider becoming a consultant to avail of the substantial tax saving possible in respect of income derived as a consultant. For people whose remuneration is likely to the significantly higher than even ` 10 lakh p.a. it is better to start a consultancy organisation under the banner of a private limited company whereby all the benefits available to a salaried employee can be enjoyed by a consultant including tax free perquisites and allowances.


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