It is important to understand the provisions of the Income-tax Act, 1961 that apply to consultancy services. Proper knowledge of these rules helps consultants plan their taxes efficiently and stay compliant with the law.

Who is a Consultant?

 The Income-tax Act, 1961 does not specifically define the term “consultant.” However, consultancy services fall under the category of “Profession” as per Section 2(36) of the Act. As a result, income earned by consultants is taxed under the head Profits and Gains from Business or Profession. Such income may be eligible for the Presumptive Taxation Scheme under Section 44ADA and is also subject to Tax Deduction at Source (TDS) under Section 194J.

Meaning of “Professional Services” Under Section 194J

 Professional services include services related to law, medicine, engineering, architecture, accountancy, technical consultancy, interior decoration, and advertising. This category also covers professionals notified by the CBDT, such as authorised representatives, film artists, company secretaries, professionals in the IT sector, sports persons, and others.

Meaning of “Fees for Technical Services” Under Section 194J

 Fees for technical services refer to payments made for managerial, technical, or consultancy services, excluding amounts treated as salary.

• Technical Services: Services that require specialised technical knowledge or technology-based skills.
• Managerial Services: Services involving expertise in managing or supervising a client’s business operations.
• Consultancy Services: Services that provide professional advice and guidance to help clients make informed business decisions and strategies.

Applicability of Tax on Consultancy Services

Income earned by consultants is taxable under the normal provisions of the Income-tax Act, 1961 applicable to individuals. The tax treatment for consultants is explained below:

Presumptive Taxation Scheme

 As per Section 44ADA of the Income-tax Act, consultants with annual gross receipts up to ₹50 lakh can opt for the presumptive taxation scheme, which simplifies compliance and return filing. Under this scheme, 50% of the gross receipts are considered as taxable profit.

 Further, the turnover limit is extended to ₹75 lakh if cash receipts during the year do not exceed 5% of total gross receipts.

 Note: This scheme can be chosen only when gross receipts are within the prescribed limits. If income exceeds ₹50 lakh or ₹75 lakh, as applicable, consultants are required to compute tax under the normal provisions.

Basic Exemption Limit

 Individuals are eligible for a basic exemption limit of ₹2,50,000 under the old tax regime or ₹3,00,000 under the new tax regime. Income up to this limit is not subject to income tax.

The rebate under Section 87A varies between the two tax regimes:

• Old Tax Regime: Consultants with taxable income up to ₹5,00,000 can claim a rebate of ₹12,500.
• New Tax Regime (Applicable from Assessment Year 2025–26): Consultants with taxable income up to ₹7,00,000 are eligible for a rebate of ₹25,000.

Old Tax Regime

 Under the old regime, consultants can lower their taxable income by claiming deductions under sections such as 80C, 80D, 80E, and others. Additionally, those earning up to ₹5,00,000 can avail the Section 87A rebate of ₹12,500, reducing their tax liability.

New Tax Regime (Applicable from Assessment Year 2025–26)

 Consultants opting for the new regime cannot claim most deductions, except for limited specified ones. However, the benefit lies in a higher rebate under Section 87A. The rebate of ₹25,000 can fully offset the tax liability for consultants with income up to ₹7,00,000.

Therefore, consultants with total income up to ₹7,00,000 in a financial year will not be liable to pay income tax if they choose the new tax regime. This provision offers relief to consultants with lower incomes and encourages their continued participation in economic activities.

Taxation Rates for Consultancy Services

 Income earned from consultancy services is taxed as per the applicable income tax slab rates of the consultant. There is no separate or special tax rate prescribed specifically for consultancy income.

TDS Applicability for Consultants

 Section 194J of the Income-tax Act provides for deduction of tax at source on payments made to residents for professional or technical services. The applicable TDS rates are:

• Professional Consultancy: TDS is deducted at 10%.
• Technical Consultancy: TDS is deducted at 2%.

TDS under Section 194J does not apply when the payer is an individual or a Hindu Undivided Family (HUF), unless such individual or HUF is liable to have their accounts audited under Section 44AB.

The obligation to deduct TDS arises when the total amount paid or payable to a resident exceeds ₹50,000 in a financial year (effective from 1 April 2025). This limit applies to the total of all amounts paid, credited, or expected to be paid or credited by the payer to the payee during the year.

It is recommended to seek assistance from a professional tax consultant, as they have the required expertise to deal with complex tax provisions and ensure accurate and optimised tax filing. Professional guidance helps in minimising tax liability, maximising savings, and avoiding errors or potential scrutiny.

Applicable ITR Forms for Consultants

 Consultants opting for the presumptive taxation scheme are required to file their income tax return using ITR-4. Consultants who do not opt for the presumptive scheme must file their return using ITR-3.

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