Transitioning from Employee to Consultant for Tax Savings: What Are the Pros and Cons?

Dear Friends,

My colleague wants to save tax and wishes to transition from an employee to a consultant on paper within the same company he's currently working with. Could anyone please enlighten me on the labor laws, policies, and the pros and cons of this decision?

Thank you very much.

Regards,
KVE

By changing the status from employee to consultant, how are you going to save tax? Or is your question two-sided, i.e., tax-saving techniques and changing the status of an employee?

Tax-Saving Techniques

For tax-saving techniques, you may consult a Financial Adviser. However, if you change the status of an employee to a consultant, you do not gain anything. Any remuneration paid to the consultant, i.e., honorarium or fees or whatever name it is called, will also attract PF and other contributions. Since his job is regular in nature, he will be entitled to all statutory protections as are offered to an employee.

Regards,
Madhu.T.K

Dear Madhu T.K., thank you for taking the time to read through and respond.

He is currently working as a Manager; however, he believes he would be able to save more on tax if he works with the same company but under the title of a consultant to the company. His job profile would remain the same; it's just that on paper he'll be a consultant to the company and not working as a Manager as before. I understand that in this case, he would not be receiving any payslips from the company. I would like to know if he would still be eligible for paid leaves and PFs like every other employee in the company.

Looking forward to your reply.

Regards,
KVE

Consultant vs. Employee: Understanding the Differences

Being a consultant and an employee are two different issues. The fees received by a consultant will be subject to Income Tax, but not under the head Salaries; instead, it falls under Profits & Gains from Business and Profession. As earlier pointed out, to know the tax liability of a consultant, it is advisable to ask a Financial Adviser.

PF and ESI Deductions

Regarding PF deductions, any person who does work of a regular nature, by whatever name called, can be subjected to EPF coverage if their salary is within the limits as prescribed under the EPF Act. The situation is similar with ESI as well. Just by declaring that one is not an employee but a consultant or professional, the laws applicable to employees cannot be avoided. There should be adequate proof to show that they provide only professional service and that whatever remuneration the company pays to them is purely a fee for their expert service.

Consultancy Post-Retirement

An employee who was superannuated as per the policy of the company but is allowed to continue in service considering their know-how and expertise may be treated as a consultant in their second phase of service (i.e., after retirement). In such a case, they will be exempted from PF. That exemption is available to any person not being a consultant who has withdrawn their PF accumulations after attaining at least 50 years of age and who is in receipt of a Provident Fund Pension.

Regards,
Madhu.T.K