Understanding the provisions of the Income-tax Act, 1961 is crucial for consultants to ensure proper compliance and effective tax planning. Familiarity with the applicable tax rules helps consultants manage their liabilities efficiently and make informed financial decisions.
Who Is a Consultant?
The Income-tax Act, 1961 does not specifically define the term consultant. However, consultancy services are treated as a profession under Section 2(36) of the Act. As a result, income earned by consultants is taxable under the head Profits and Gains from Business or Profession. Such income may also be eligible for the presumptive taxation scheme under Section 44ADA and is subject to Tax Deducted at Source (TDS) under Section 194J.
Meaning of “Professional Services” under Section 194J
Professional services include services rendered in fields such as legal, medical, engineering, architecture, accountancy, technical consultancy, interior decoration, and advertising. The definition also extends to professionals notified by the CBDT, including authorised representatives, film artists, company secretaries, IT professionals, sports persons, and other specified individuals.
Meaning of “Fees for Technical Services” under Section 194J
Fees for technical services cover payments made for managerial, technical, or consultancy services, excluding amounts classified as salary.
- Technical services: Services requiring specialised technical knowledge or technological expertise.
- Managerial services: Services involving planning, supervision, and management of a client’s business affairs.
- Consultancy services: Services that provide professional advice, guidance, or strategic support to clients.
Tax Applicability on Consultancy Income
Income earned from consultancy is taxable under the regular provisions of the Income-tax Act, 1961 applicable to individuals. The tax framework for consultants includes the following:
Presumptive Taxation Scheme (Section 44ADA)
Consultants with annual gross receipts not exceeding ₹50 lakhs can opt for the presumptive taxation scheme under Section 44ADA. Under this scheme, 50% of gross receipts are deemed as taxable income, reducing compliance requirements and simplifying return filing.
The turnover limit is extended to ₹75 lakhs if cash receipts during the year do not exceed 5% of total gross receipts.
Note: Presumptive taxation can be chosen only if gross receipts are within the prescribed limits. If income exceeds ₹50 lakhs or ₹75 lakhs, as applicable, consultants must compute tax under the normal provisions.
Basic Exemption Limit
Individual consultants are eligible for a basic exemption limit of ₹2,50,000 or ₹3,00,000, as applicable under the chosen tax regime. Income up to this limit is not taxable.
Rebate under Section 87A
The rebate available differs under the two tax regimes:
- Old Tax Regime: Consultants with taxable income up to ₹5,00,000 are eligible for a rebate of ₹12,500 under Section 87A.
- New Tax Regime (from Assessment Year 2025–26): Consultants with taxable income up to ₹7,00,000 can claim a rebate of ₹25,000.
Old Tax Regime
Under the old regime, consultants can reduce their taxable income by claiming deductions under sections such as 80C, 80D, 80E, and others. Additionally, consultants with income up to ₹5,00,000 can avail the rebate under Section 87A, lowering their tax liability by ₹12,500.
New Tax Regime (from Assessment Year 2025–26)
Consultants opting for the new regime cannot claim most deductions, except for a few specified ones. However, this regime offers a higher rebate under Section 87A amounting to ₹25,000. This rebate can effectively reduce the tax payable to zero for consultants with income up to ₹7,00,000.
As a result, consultants earning up to ₹7,00,000 in a financial year can be fully exempt from income tax if they choose the new tax regime. This provision offers meaningful relief to consultants with lower income levels and supports their continued participation in economic activity.
Tax Rates Applicable to Consultancy Services
Income earned from consultancy services is taxed according to the applicable income tax slab rates of the consultant. There is no special or separate tax rate prescribed specifically for consultancy income; it is treated like any other income under Profits and Gains from Business or Profession.
TDS Applicability for Consultants
Tax Deducted at Source (TDS) on consultancy payments is governed by Section 194J of the Income Tax Act. This section applies to payments made to residents for professional or technical services. The applicable TDS rates are:
- Professional consultancy services: TDS at 10%
- Technical consultancy services: TDS at 2%
TDS under Section 194J is generally not applicable when the payer is an Individual or a Hindu Undivided Family (HUF), unless they are required to get their accounts audited under Section 44AB.
The obligation to deduct TDS arises when the total amount paid or payable to a resident consultant exceeds ₹50,000 in a financial year (effective from 1 April 2025). This limit considers the aggregate of all payments made or credited, or expected to be made or credited, during the entire financial year.
Given the complexity of tax provisions, it is advisable to consult a qualified tax professional. A tax consultant can help ensure accurate compliance, optimise tax planning, reduce liabilities, and minimise the risk of errors or scrutiny by tax authorities through tailored advice based on your specific financial situation.
Applicable ITR Forms for Consultants
- Consultants opting for the presumptive taxation scheme are required to file their return using ITR-4.
- Consultants who do not opt for presumptive taxation must file their return using ITR-3.
Frequently Asked Questions (FAQs)
1. What is meant by consultancy services for tax purposes?
Consultancy services refer to professional or technical services provided in exchange for a fee, such as management consulting, IT consulting, legal advisory, financial advisory, and technical expertise.
2. Is income from consultancy services taxable in India?
Yes, income earned from consultancy services is taxable in India and is generally treated as Income from Business or Profession under the Income Tax Act.
3. What tax rate applies to consultancy income?
Consultancy income is taxed according to the applicable income tax slab rates for individuals or the corporate tax rates for companies, depending on the structure of the consultant.
4. Does GST apply to consultancy services?
Yes, consultancy services are subject to GST, typically at 18%, unless specifically exempt or zero-rated under GST provisions.
5. Is GST registration mandatory for consultants?
GST registration is mandatory if the consultant’s turnover exceeds the prescribed threshold or if services are provided to clients outside India, subject to export of services rules.
6. Can consultants claim business expenses against consultancy income?
Yes, consultants can claim legitimate business expenses such as office rent, travel, internet, software subscriptions, professional fees, and marketing costs.
7. Can consultants opt for presumptive taxation?
Yes, eligible consultants can opt for presumptive taxation under Section 44ADA, allowing them to declare 50% of gross receipts as taxable income, subject to limits.
8. Is TDS applicable on consultancy fees?
Yes, Tax Deducted at Source (TDS) is generally applicable on consultancy payments under relevant sections of the Income Tax Act, depending on the nature of services and payer category.
9. Do consultants need to pay advance tax?
Yes, consultants are required to pay advance tax if their total tax liability exceeds the specified limit, to avoid interest and penalties.
10. Are consultancy services eligible for tax deductions or exemptions?
While most expenses are deductible, consultants may also claim eligible deductions under Chapter VI-A, such as Sections 80C and 80D, subject to conditions.
11. How should consultants maintain records for tax purposes?
Consultants should maintain invoices, expense bills, bank statements, contracts, and GST records to ensure compliance and smooth tax filing.
12. What income tax return form should consultants file?
Consultants usually file ITR-3 or ITR-4, depending on whether they opt for presumptive taxation or regular accounting.
