Guidance on maximum tax savings for an individual who is on payroll as a consultant with an organization

1. Nature of Income

Since you are raising invoices as a consultant, the income is treated as “Professional Income” under PGBP (Profits & Gains from Business/Profession), not salary. The 10% TDS being deducted is u/s 194J.

2. Deductions Allowed

Unlike salaried income (where only standard deduction + 80C/80D etc. are available), as a consultant you can deduct business expenses before tax, such as:

• Internet, mobile, laptop depreciation, software subscriptions.

• Rent if you use home as office (proportionate).

• Travel/conveyance for work.

• Professional courses, books, memberships.

This can substantially reduce taxable income.

3. Compliance Options

• Presumptive Tax (44ADA): If gross receipts ≤ ₹75 lakh/year, you can declare 50% of receipts as income, balance 50% deemed as expenses (no need to maintain detailed records). Tax is only on 50%. Compliance is minimal.

• Regular books: If your actual expenses are high (>50%), you can claim them and show lower profit, but then books, ITR-3 and audit rules may apply.

4. Usual Deductions

You can still claim normal deductions:

• 80C: LIC, ELSS, PF, housing loan principal etc. (₹1.5L limit).

• 80D: Health insurance premium (₹25k/₹50k).

• NPS (80CCD(1B)): Extra ₹50k.

• Home loan interest (u/s 24) if applicable.

5. Quick Example (₹20L receipts)

• If on salary: full ₹20L taxable (less standard deduction + 80C).

• If consultant (44ADA): taxable = ₹10L only → major tax saving.

You may opt for presumptive taxation for your consultancy income, if its less than Rs 75 Lakhs.  Only 50% of your income will be considered as assessable income. However, please note that if your fee is more than Rs 20 Lakhs, you will be covered under GST. 

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If your income is more than Rs 75 Lakhs, I suggest you may take the help of a CA for ensuring proper compliance not only with Incometax but also with GST. 

You’ve essentially moved from being an employee (salary income) to being treated as a consultant (professional income). This changes how tax works for you — and it gives you some opportunities for tax savings, but also some responsibilities. Let’s go step by step.

1. Why this matters

• Employee payroll → Tax deducted at source as TDS on salary (Form 16), eligible for all employee-related exemptions (standard deduction, HRA, LTA, etc.).

• Consultant payroll → You raise invoices, the company deducts TDS u/s 194J @ 10% (not salary TDS). You don’t get employee benefits, but you get the flexibility to claim business/professional expenses against your income.

2. How you will be taxed

• You must report your income under “Profits and Gains from Business or Profession (PGBP)” in ITR-3.

• Gross income = sum of invoices raised.

• From this, you can deduct allowable expenses (see below).

• Net income after expenses = taxable income.

3. Ways to save tax (with less compliance)

Option A: Presumptive taxation (Section 44ADA)

• Available for professionals (IT consultants qualify).

• If your gross receipts ≤ ₹75 lakh (limit enhanced from ₹50L in Budget 2023), you can declare 50% of receipts as income, balance 50% is deemed expenses.

• No need to maintain detailed books.

• You pay tax on only half your receipts.

• Very low compliance → file ITR-4 if you’re a resident, else ITR-3 for NRI.

If your actual expenses are less than 50% of your receipts, this is the best option.

Option B: Actual expenses (normal business income)

• You can claim all actual business-related expenses:

  • Internet, laptop, software subscriptions, cloud storage.

  • Rent (if you work from home, you can claim proportionate house rent).

  • Travel, phone bills.

  • Professional courses, memberships, certifications.

• You must keep bills, bank statements, invoices.

• You’ll need to maintain books if income > ₹2.5 lakh.

• If your actual expenses > 50% of your income, this option saves more tax than 44ADA.

4. Other deductions available

• 80C (LIC, ELSS, PPF, EPF if still continuing, principal of home loan).

• 80D (medical insurance premiums).

• 24(b) (home loan interest if you have a house property).

• NPS (80CCD(1B)) extra ₹50k.

• These are in addition to your professional deductions.

5. Compliance things to remember

• Your client is right to deduct 10% TDS u/s 194J. You’ll see this in Form 26AS / AIS.

• You must file ITR-3 (not ITR-1/2).

• If your tax liability > ₹10,000 after TDS, you must pay advance tax quarterly.

• GST registration is not required unless your receipts > ₹20 lakh (₹40 lakh for goods). Since you are providing IT services, the ₹20 lakh threshold applies.

Thanks
Damini