If you’re over-burdened with your work as an employee and shouldering a huge tax burden in every Financial Year, here is a tax saving tac-trick by which you can dis-burden yourself from overtime and heavy tax liabilities. Yes, you can leave your job and start your own consulting business.
Table of Contents
Conditions For Switching To Consultancy
In order to save tax you may switch to consultancy role only if your net income under the presumptive scheme is less than your salary.
What is a Presumptive Scheme For Professionals & How is it tax saving?
The term ‘presumptive taxation’ is a system in which a government assumes a certain percentage of your turnover/gross receipts as your taxable income irrespective of the expenses incurred.
Section 44ADA provides a simple method of taxation for small professionals who are doctors, CAs, Lawyers, etc. Section 44ADA offers a scheme of presumptive taxation for profits and gains arising from professions mentioned under Section 44AA(1) of the Income Tax Act, 1961.
The benefit of section 44ADA can be taken only by those specified professionals whose annual gross receipts are under Rs.50 lakh. However, it is worthwhile to note that the limit of Rs.50 lakh is replaced by Rs.75 lakh, in the case where 95% of the receipts are through recognised banking channels.
The Budget 2023 revised presumptive taxation limits under Section 44ADA from FY 2023-24 to be from Rs. 50 lakhs to Rs. 75 Lakhs.
Applicability of Tax Saving Presumptive Scheme For Professionals
The Presumptive Scheme shall be payable on the following professionals:
- Lawyer/Advocates
- Doctors
- Engineers
- Architects
- Accountants
- Technical consults
- Interior Designers
- Movie industry professionals like producers, directors, actors, editors, music directors and others
- Authorised representatives (excludes employees and accountants)
- Any other profession notified by the Central Board of Direct Taxation (CBDT)
Illustrations
Tax In Case of Employees
Suppose ‘X’ is an employee in ‘ABC’ Company and his annual income is Rs. 45 Lakhs. X’s gross income will be Rs. 45 Lakhs, the standard deduction will be Rs. 75,000/- and the net taxable income shall be Rs. 44, 25,000/-. In this case the total tax payable would be Rs. 10,01,500/-.
Tax In case of Consultants
On the other hand Suppose ‘X’ is a consultant and his annual income is Rs. 45 Lakhs. X’s gross income will be Rs. 45 Lakhs, the standard deduction will be zero. However, the scenario changes here, where 50% of the gross income under the presumptive tax scheme becomes taxable. Resultantly the net taxable income shall be Rs. 22,50,000/-. In this case the total tax payable would be Rs. 3,49,000/-.
Highlights
It is worthwhile to note that section 44ADA can be taken only by those specified professionals whose annual gross receipts are under Rs.75 lakhs.
What happens where GST is paid to consultants by the companies?
In this case if you are woking as a consultant for a company, the company shall offset the GST paid to you as Input Tax Credit against the GST collected from the client and it is not an added expenditure for any company engaging a consultant.
Consultancy Lands You In GST Compliances
For example let’s suppose ‘X’ gets registered under GST due to the increase in the turnover more than Rs. 20 Lakhs. In the new tax regime ‘X’ can pay a flat rate of 6% GST under the composite scheme.
Read More: AMNESTY SCHEME | FAQS ON WAIVER OF INTEREST OR PENALTY ON DEMANDS PERTAINING TO FYS 2017-20
