Tax on Consultancy Services: Applicability, Tax Rate, and Key Insights

Who Qualifies as a Consultant?

 Although the Income Tax Act, 1961 does not directly define the term “Consultant,” the services rendered by such professionals are treated as a “Profession” under Section 2(36) of the Act. As a result, any earnings from consultancy services are taxable under the head ‘Profits and Gains from Business or Profession’. Such income may also fall under the scope of the Presumptive Taxation Scheme as per Section 44ADA, and is subject to Tax Deduction at Source (TDS) under Section 194J.

What Are “Professional Services” Under Section 194J?
Section 194J categorizes professional services to include fields such as law, medicine, engineering, architecture, accountancy, interior design, advertising, and technical consultancy. The Central Board of Direct Taxes (CBDT) has further extended this to include specific professionals like authorized representatives, film artists, company secretaries, IT professionals, and sports figures.

Definition of “Fees for Technical Services” Under Section 194J
This section also covers payments for technical services, which encompass managerial, consultancy, and technical advisory roles. It is important to note that such payments are not treated as salary.

• Technical Services involve specialized knowledge or technology-based expertise.
  
  

• Managerial Services refer to the capability to manage or oversee operations on behalf of a client.
  
  

• Consultancy Services include professional advice offered to help clients make strategic or operational decisions.

Applicability of Tax on Consultancy Services

Income earned by consultants falls under the purview of individual taxation as per the provisions of the Income Tax Act, 1961. The applicable tax structure for consultants includes the following:

Presumptive Taxation under Section 44ADA
Consultants with gross receipts not exceeding ₹50 lakhs annually can opt for the presumptive taxation scheme under Section 44ADA. Under this scheme, 50% of total receipts are treated as taxable income, allowing for simplified tax compliance and reducing the burden of maintaining detailed records.

For those with minimal cash transactions (less than 5% of gross receipts) during the financial year, the threshold to avail of this scheme increases to ₹75 lakhs.

Note: If gross receipts exceed ₹50 lakhs or ₹75 lakhs (based on cash usage), the presumptive scheme cannot be availed. In such cases, the consultant must follow the standard taxation provisions under the Act.

Basic Exemption Limits and Section 87A Rebate

Every individual taxpayer, including consultants, is eligible for a basic exemption of either ₹2,50,000 or ₹3,00,000, depending on whether the old or new tax regime is chosen.

Rebate Under Section 87A:

• Old Tax Regime: Taxpayers with taxable income up to ₹5,00,000 can claim a rebate of ₹12,500, reducing their tax liability to zero.
  
  

• New Tax Regime (from AY 2025–26): Taxpayers with taxable income up to ₹7,00,000 can claim a rebate of ₹25,000, effectively eliminating their tax liability.
  
  

Comparison of Tax Regimes:

• Old Regime:
  Consultants can claim various deductions (e.g., under Sections 80C, 80D, 80E) to reduce their taxable income. Those earning up to ₹5,00,000 can also benefit from a rebate of ₹12,500 under Section 87A.
  
  

• New Regime (Effective AY 2025–26):
  While the new regime limits the availability of deductions, it compensates by offering a higher rebate of ₹25,000. As a result, consultants with income up to ₹7,00,000 pay no tax, providing relief to lower-income earners.
  
  

Taxation Rates Applicable to Consultancy Services

Income earned from consultancy services is taxed based on the individual slab rates applicable to the consultant. There is no distinct or separate tax rate specifically designated for consultancy income; it is treated like any other professional income under the Income Tax Act.

TDS Provisions for Consultants

Under Section 194J of the Income Tax Act, tax is required to be deducted at source (TDS) when payments are made to resident individuals for rendering professional or technical services. The TDS rates under this section are:

• 10% for Professional Consultancy Services
  
  

• 2% for Technical Consultancy Services
  
  

This TDS requirement does not apply if the payer is an individual or Hindu Undivided Family (HUF), unless they are required to undergo a tax audit under Section 44AB.

From 1st April 2025, TDS under Section 194J becomes applicable only when the total amount paid or payable to a consultant exceeds ₹50,000 in a financial year. This threshold is calculated by aggregating all such payments or credits made or likely to be made during the year.

Professional Assistance is Recommended

Given the complexities involved in TDS rules, threshold limits, and filing obligations, it is strongly recommended to engage a qualified tax consultant. Their professional expertise ensures accurate tax filings, helps reduce errors, and provides strategies to optimize tax savings while ensuring compliance.

Applicable ITR Forms for Consultants

• ITR-4: To be used by consultants who choose the presumptive taxation scheme under Section 44ADA.
  
  

• ITR-3: Applicable to consultants who do not opt for the presumptive scheme and maintain regular books of accounts.