Friday, February 4, 2011

Being a Consultant

Pros and Cons of being a Consultant

They are not on the rolls of a company. They are not entitled to benefits extended to the regular staff. They also don't have the job security that a regular employee enjoys. Why then are consultants such a happy lot?
One reason why an increasing number of people are preferring to work as consultants is that the compensation structure promises the best of both worlds -- a high takehome income with a low income-tax liability. They are attracted by the benefits that consultancy holds out in terms of a lump-sum payment without any deductions and the freedom to deduct everyday expenditure like conveyance and utility bills from the taxable income.

In a consultancy, the individual bills the company for services rendered and gets paid a lump-sum amount for those services. He is not on the rolls of the company and is not eligible for any retirement benefits; there are no deductions like provident fund or pension contributions. There is only a 10.3% tax deduction at source.

The real benefit of being a consultant kicks in with the deductible expenses. The taxman treats a consultant's work as a business and extends to him the same benefits. If a consultant buys a computer worth Rs 50,000 for his professional work, his taxable income gets reduced by Rs 30,000 because he gets 60% depreciation on computers. A new car worth Rs 6,00,000 will reduce his taxable income by Rs 1,20,000 (20% of the price) in the first year, Rs 96,000 in the second year and almost Rs 75,000 in the third year. Buy a new phone worth Rs 20,000 and your taxable income goes further down. The furniture uses for office work, electricity bills, phone bills, driver's salary -- anything and everything that an individual spends on while going about his work are permissible expenses.

But hang on...there are some drawbacks too. A consultant does not get tax exemption for house rent, which is an important head of expenditure and can account for almost 20-25% of a person's salary. There are also no tax-free perks such as medical allowance and leave travel assistance.

Also, while the lack of PF contribution may fatten the take-home income, in the long run this might not be good. The PF is a convenient way of creating a retirement corpus. The money trickling into your account every month and the interest it earns every year accumulates into a sizeable nest egg. If he is not a disciplined investor, a consultant could face trouble after retirement.

The problems don't end here. A consultant has to maintain proper record of all work-related expenses incurred for up to eight years after filing the returns. It's a tedious process and mistakes could result in a notice form the taxman. Besides, those with an annual income of Rs 10,00,000 or more are required to get their expenses duly audited by a chartered accountant. Also, there is the additional botheration of service tax that has to be charged on every bill. So, assess the benefits and the problems carefully before you opt for this arrangement. You might be trading of less taxes with more hassles.

No comments:

Post a Comment