Should you be a salaried person or consultant if your annual income is Rs 60 lakh?

The Union Budget 2023 has proposed significant changes for individual taxpayers in the new tax regime as well as for specified professionals by way of enhancing the threshold limit for specified professionals for opting for presumptive taxation under Section 44ADA of the Income Tax Act, 1961.

In the light of these changes, it becomes vital for the individuals to determine whether it would be beneficial for them to opt to be a salaried individual or a professional consultant from an income tax perspective. Through this article, we aim to highlight the parameters to be considered by an individual before deciding on the most suitable option when the annual income is Rs 60 lakh.

Key changes proposed in Union Budget 2023

Proposed changes for salaried taxpayers
In order to encourage individuals to opt for the new tax regime, the budget proposed several significant changes in the new tax regime under Section 115BAC of the Income-tax Act. The changes are as follows:

  • Restricting the highest rate of surcharge from 37% to 25%
  • Increase in the basic exemption limit from Rs 2.5 lakh to Rs 3 lakh and reducing the slabs from 6 to 5
  • Making the new tax regime as the default regime
  • Extending the benefit of standard deduction of Rs 50,000 under the new tax regime
  • Increasing the threshold total income (gross income less deductions) limit from Rs 5 lakh to Rs 7 lakh for rebate under Section 87A

Proposed changes for professionals (presumptive taxation u/s 44ADA)
Section 44ADA of the Income-tax Act provides an option of presumptive taxation for specified professionals (such as medical, legal or accountancy professional, film artiste, engineer, technical consultant, architecture, interior decorator, company secretary, etc). Here, eligible taxpayers with gross receipts up to Rs 50 lakh could declare profits without the requirement of audit and maintenance of books of accounts. Under Section 44ADA, 50% of the gross receipts is considered as income of the taxpayer. On this income, tax is calculated on the basis of the income tax slab concerned.

However, such taxpayers would not be allowed any deduction of expenditure under sections 30 to 38 (for instance, claim of depreciation u/s 32; specified expenditure such as rent, repairs u/s 30; business-related expenses u/s 37) as it is deemed that such deductions are already availed by the taxpayers opting for the presumptive scheme.

The Budget 2023 proposed to increase the threshold limit to Rs 75 lakh from Rs 50 lakh provided the cash receipts received during the financial year does not exceed 5% of the total gross receipts. Thus, if the total receipts are more than Rs 50 lakh and cash receipts exceed 5% of it, then taxpayers would lose the benefit for higher limit of Rs 75 lakh in presumptive taxation under Section 44ADA.What to consider while choosing between salaried and consultant status
The following are some parameters that must be taken into consideration for the purpose of determining whether it is better to be classified as a salaried individual or a professional while calculating tax:

Claiming of business-related expenses
A consultant, as a professional, can claim business-related expenses as deductions (example are training expenses or travelling expenses) under the old tax regime. It is to be noted that in case these people opt for presumptive taxation under Section 44ADA, they cannot claim such expenses as 50% of their gross receipts or turnover will implicitly be considered as income from business and profession.

On the other hand, salaried employees are eligible to avail the benefit of only those exemptions as specified under the salary head such as house rent allowance (HRA), leave travel concession and standard deduction.

Taxability of perquisites
All perquisites received by professionals during the course of business are fully taxable and are not eligible for any deduction. However, salaried employees can avail the benefit of certain deductions or exemptions against perquisites. For instance, a salaried individual is eligible to claim deduction or exemption on motor car facility or rent-free accommodation provided by the employer, medical facility, use of movable assets, motor car facility and lunch facility, among others.

Complexity of ITR forms (ITR1/ITR2 vs ITR3/ITR4)
Filing the appropriate income tax return (ITR) forms is very crucial for every taxpayer as the use of a wrong form may be treated as a defective return and can lead to several tax consequences. Individuals can file ITR1, ITR2, ITR3 or ITR4 depending on their sources of income. Generally, salaried employees getting income from one house property, other sources, etc, are eligible to file ITR1 (which is the simplest of the ITRs). Those salaried employees who are not eligible to file ITR1 are required to file ITR2. Do note that ITR2 is much more detailed than ITR1.

Further, consultants (other than those opting for presumptive taxation) would be required to file ITR3, which is the most complex among the four ITR forms. Individuals deriving income from business or profession and opting for presumptive taxation would be required to file ITR4, which is comparatively less detailed as compared to ITR3.

Documentation requirement
Salaried individuals are under an obligation to furnish details of their investment and expenditures incurred in Form 12BB, along with documentary evidence of such investments and expenditures, by the end of the financial year so as to enable their employer to deduct tax according to the provisions of Section 192. If the required documents are not submitted to the employer, a higher tax may be deducted from the salary income.

On the other hand, professionals are just required to comply with details of gross receipts. Though, professionals are not required to submit any documents while filing the ITR, in case of litigation or scrutiny, the income tax department will ask for documents to substantiate the claims made in the tax return form.

Option for presumptive taxation scheme
An individual working as a salaried employee can either opt for the old tax regime with all available deductions and exemptions or the new tax regime with concessional tax rates subject to restrictions on deductions and exemptions. The option to choose between the tax regimes must be exercised by salaried individuals every year.

However, professionals have an additional option of presumptive taxation scheme under Section 44ADA, as discussed above. Opting for presumptive taxation can considerably reduce one’s tax liability as it directly treats 50% of the gross receipts as profits on which the person would be liable to pay tax. The tax payable on presumptive income is based on the tax regime chosen by professionals. Professionals cannot choose between the old and new tax regime every year. According to income tax laws, once they have opted out of the new tax regime (which is the default option), they have a once-in-a-lifetime opportunity to switch back to the new tax regime.

Comparative Illustration
Here is an illustration showing evaluating the tax liability of an individual opting to be a salaried employee and an individual opting to be a consultant. Here are the assumptions made for the purpose of calculation:

(i) It is assumed that the individual is a resident and ordinary resident of India according to the prevailing Indian income tax laws
(ii) The resident individual is aged less than 60 years
(iii) The resident individual is eligible to be classified as a specified professional under Section 44AA(1) for the purpose of presumptive taxation
(iv) The resident individual fulfils all the relevant conditions as prescribed under the I-T Act for the purpose of claiming exemptions and deductions
(v) Slab rates proposed in the Union Budget 2023 for the new tax regime are considered for the calculation

Salaried Employee Salaried Employee Consultant Consultant
Particulars (assumed s/he follows old tax regime) (assumed s/he follows new tax regime u/s 115BAC) (PGBP = presumptive taxation + old tax regime) (PGBP = presumptive taxation + proposed new tax regime u/s 115BAC)
Gross salary 60,00,000 60,00,000
Less: Standard deduction u/s 16(ia) 50,000 50,000
Net salary 59,50,000 59,50,000
Income from business & profession
Gross receipts 60,00,000 60,00,000
Less: Allowable business expenses -30,00,000 -30,00,000
50% of the gross receipts deemed to be expensed u/s 44ADA 50% of the gross receipts deemed to be expensed u/s 44ADA
Profits & gains from business & profession 30,00,000 30,00,000
Income from house property
Net annual value (NAV)
Less: Interest on borrowed capital for self-occupied property u/s 24(b) -2,00,000 -2,00,000
Loss from house property -2,00,000 Cannot be setoff under new tax regime -2,00,000 Cannot be setoff under new tax regime
Gross total income 57,50,000 59,50,000 28,00,000 30,00,000
Less: Deductions u/s VI-A
8OC -1,50,000 No Deduction under new tax regime -1,50,000 No Deduction under new tax regime
80D -25,000 No Deduction under new tax regime -25,000 No Deduction under new tax regime
80CCD(1B)-NPS -50,000 No Deduction under new tax regime -50,000 No Deduction under new tax regime
Net total income 55,25,000 59,50,000 25,75,000 30,00,000
Total tax liability (considering surcharge and cess) 16,81,680 16,98,840 6,08,400 6,24,000

Please note that the above computation is purely illustrative and based on various assumptions as aforementioned and does not constitute any legal or professional tax advice from the author and is only for comparative reference purposes. Accordingly, every taxpayer must determine what is beneficial for them from a tax perspective (being salaried personnel vis-à-vis professional) taking into consideration their expenses, investments, etc.

(The writer is Founder, RSM India – a tax consulting firm.)

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