Budget 2005 has brought both joy and misery to taxpayers, particularly the salaried. Finance Minister P. Chidambaram has simplified income tax structures, and you have to pay less tax as a consequence. But while it's true that with the basic exemption limit being raised from Rs 50,000 to Rs 1,00,000, more people would fall outside the minimum taxable limit, the introduction of a couple of riders, such as doing away with standard deduction and the introduction of a fringe benefit tax (FBT), don't augur well for the salaried community. If anything, it threatens to increase its tax burden rather than provide any relief.

The removal of standard deduction (up to Rs 30,000), which was available only to the salaried class, will hit hardest. That's because standard deduction was a substitute for expenses incurred while working (akin to the fixed percentage standard deduction available for repairs in rented-out properties), and doing away with it means the possibility that more people will qualify to pay income tax, particularly people with lower incomes (see Are You Better Off?), is very real. Says tax expert Kanu Doshi: "Doing away with standard deduction literally tends to suffocate the middle class as it provides extremely limited scope for tax planning." As for FBT, since it's the employer who is liable to pay 30 per cent tax on fringe benefits given to employees, it is likely that some benefits may be withdrawn. Though there's some confusion about the exact expenses that will be covered, it is certain that most perks given to employees (like your company phone at home) will be taxed. For the employer, transferring the value of these benefits to the normal salary would save them from paying FBT, but that would proportionately add to the tax burden of the employee. Which is bad news for salaried people.

The Consultant Option

As such, it makes sense for you to consider turning consultant at the place where you work. As a consultant, you are able to retain the value of all perceived benefits such as gratuity, employer's contribution to provident fund, and so on. And with several companies allowing consultants to work in normal office hours, the only thing that will change will be your tax status. Doshi, for one, advocates the consultant option, and points out that whereas it is not possible to claim any expenses as a salaried individual, as a consultant the different heads under which you can claim professional expenses is pretty much endless. These include travelling expenses, membership fees for clubs and associations, depreciation on assets used for business purposes like cars or computers, telephone bills (both landline and mobile), money spent on entertaining guests and business associates, subscriptions to magazines, money spent on education, medical expenses, even salary paid to your spouse can qualify as a valid expense as long as you can prove that your spouse is qualified for that job. All these expenses can be deducted from a consultant's income, which in turn would lead to a substantially lower final tax figure (see Being A Consultant Pays). In addition to all this, a consultant can work out of home, and show expenses as home office expenses. Says Doshi: "At any level, the income derived as a consultant would give several tax advantages by way of various allowances of expenses."

But naturally, there are caveats. For all expenses incurred, you need to show substantial proof, so it's important that only genuine expenditure be shown as professional expenses. Example? "If you are working from home, you can't claim your entire landline bill as professional expenditure," says Gautam Nayak, President, Bombay Chartered Accountants Association. Then, with the onus of proof on you, you need to keep all your corners covered. That, according to Prasad R., founder of Filemyreturns.com, means keeping tabs on every penny that you spend, from cab fare to breaking up your phone bill into official and personal segments. It also means holding on to every small voucher that proves an expense, maintaining extensive books of accounts, and getting a tax audit done if your income is above Rs 10 lakh. "It (being a consultant) is a good option as long as you can show all the expenses incurred," says Prasad. Then, the overall process of filing returns is much simpler for a salaried employee.

The most important caveat, though, is that your employer has to agree to your turning consultant, which some may not be very willing to do. If you can wangle that, and if you have the diligence to handle the assorted headaches that come with being a consultant, it's time for you to change track.