Earlier I was a full-time salaried employee now I have been retained as a consultant for content writing. I want to understand if there is any difference in taxation of income for me now. How is the income of a consultant taxed? Is it different for how the income of a salaried individual is taxed?
Reply by Balwant Jain, a tax and investment expert
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The salaries received are taxed under the head “Salaries” whereas the income of a consultant is taxed under the head “Profits and gains of Business or Profession.” Taxation rules for both differ.
As a salaried person you are entitled for a standard deduction of up to Rs 50,000 against your taxable salary to take care of expenses incurred by you for earning your salary income without having to submit any documentary evidence which deduction is not available to a consultant. Please note that as a consultant you are allowed to claim certain expenses actually incurred in connection with your work as a consultant and which are not personal in nature and are not of capital nature. Such expenses which a consultant can claim include expenses like internet expenses, mobile expenses, printing and stationery, conveyance expenses etc. to the extent these are directly related with your working as consultant after removing component for personal use if any.
You can also claim very small portion of house rent (If house is rented) and electricity expenses in respect of the house. Depreciation is also allowed in respect of computer and printer bought by you and used for your wok. In addition to the depreciation, you can also claim expenses incurred on repairs and maintenance of the computer and printer. The expenses listed are enumerative and not exhaustive. So you can claim any other expenditure if you can establish that the same has been incurred for your working as a consultant for example travelling expenses incurred in connection with your work as consultant.
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There are certain specified professions where you have the option to choose presumptive scheme of taxation where your income is presumed to be 50% of your gross professional receipts. Since you are freelancing as a writer, you are not eligible to offer your income on presumptive income. The net of professional charges received after deducting eligible expenses incurred are taxed under the head “profits and gains of business and gains”. In case you have any other income like rent, interest, dividends, capital gains etc., the incomes under all the heads are added up for taxation purpose. In case you have taken a home loan for the house in which you are staying, interest paid on such loan can also be claimed upto Rs. 2 lakhs while aggregating your income from all the sources provided you have opted for old tax regime.
If you opt for old tax regime you are allowed to claim various deductions the same way a salaried can claim, like deductions under Section 80 C, 80CCD, 80D, 80TTA etc. In case you are staying in a rented place, you can claim the same under section 80GG upto Rs. 5,000 per month. The net income arrived at is taxed at the slab rates applicable to you. However, some capital gains are taxed at flat rates depending on the nature of the capital gains. Please note no deduction under Chapter VIA which includes these sections are available under new tax regime.
There is no difference as regards the rates at which the income of a salaried person is taxed as compared to a freelance writer or a consultant.
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