Switch to consultant from employee and you can save tax on half your income

livemint.com:

₹25 lakh of your ₹50 lakh turnover as income to be taxed, whereas you have made investments worth ₹30 lakh. Logically, how can you invest more than your income?" Karan Batra, founder of Chartered Club, agreed. “Now AIS (annual information statement) shows your investments and big-ticket expenses, which makes it easier to tally," Batra said.

The tax department has so far not flagged any cases with such discrepancy, and hence declaring 50% income continues to be the norm. Hegde said it’s an unsettled law as many tribunals have ruled that if the law itself permits taxpayers to not maintain books of accounts and offers the minimum permissible income to tax, i.e., 50%, the tax department cannot question the taxpayer. As a consultant, you will save tax when the tax-saving components in your CTC (cost to company) are lower than the expenses you are able to deduct under the presumptive taxation scheme.

For instance, Mr A is a salaried employee with gross income of ₹40 lakh and he claims ₹5 lakh as house rent allowance (HRA), ₹6 lakh on car lease and ₹1.5 lakh as Section 80C deductions under the old tax regime. With standard deduction, he gets ₹13 lakh in tax deduction and his tax liability stands at ₹6.35 lakh. Now, if Mr A was to switch to a consulting role with the same gross income, this is how his expenses would look.

His rent works out to 15% of his income. Assume he spends another 35% on utilities and other professional expenses. He can offer 50% of his income to tax, i.e., 20 lakh.

He has to pay ₹4.25 lakh in tax, which is about ₹2.1 lakh less. On the same assumptions, Mr A will pay less tax as a consultant even if he declares up to 70% as taxable income. Take note that since Mr A is under the old regime, he can further