Employees and professionals with high income levels can save on taxes if they route their income through a firm rather than receiving the payment as an individual. The logic is simple: firms can claim expenditure that individuals cannot.

According to experts, if planned well, the move could lead to substantial savings in taxes. "By taking income in business entity, certain expenditure like conveyance, rent, telephone can be claimed as an expenditure which otherwise cannot be claimed if you have a salaried income,'' said chartered accountant R Agarwal.

In addition, there are several other advantages. "This can be helpful in separating business activities from personal activities. Plus it gives a higher limit under various other tax laws like service tax and can even ensure restriction of personal liability,'' points out Arnav Pandya, CFP and financial advisor.

However, the benefits that accrue depend on the type of firm that is floated. "For instance, in case of proprietorship, there is no additional tax benefit/ tax planning available,'' says Sachin D, CEO, CFOSME Corporate Services.

When it comes to taxation, the dice is definitely loaded in favour of firms. The expense on entertainment can be deducted against revenues of the firm. But individuals do not enjoy this benefit. ``A firm can claim depreciation allowance on a vehicle, but the individual cannot claim the same,'' says chartered accountant Bhavesh Jatania.

But individuals who choose to float firms to save taxes have to comply with the additional statutory requirements. "It depends what type of business entity a person is creating. In case of proprietorship concern, one may have to obtain business licence and service tax may be applicable. For partnership and private limited compliances shall be different. A person will have to maintain books of accounts and if the gross turnover (income) exceeds the limits as per section 44 AB, than tax Audit is applicable,'' says Agarwal.

Given the increased compliance requirements for firms as against individuals, does this move still make sense? According to experts, it does. If planned properly and legally, the amount saved is substantial. "The pain is definitely worth the gain as the compliances are not too cumbersome,'' says the CEO of a firm who did not want to be quoted.

However, one should compute the total costs of meeting the compliance requirements. "For a small figure of a few lakhs the additional compliance cost could be higher in percentage terms, so a figure above Rs 7-8 lakh would actually turn out to be worthwhile,'' advises Pandya.

It would be advisable to calculate the net savings after expenses and taxes to decide whether one should create a firm or continue as an individual. "While benchmarks would differ for different people, but one should be able to save a minimum of Rs 2 lakh to make all the effort and costs worthwhile,'' adds the CEO.

You need to check with your employer if they are open to the idea of treating the employees as consultants or engaging with the firm floated by employees.

Typically, this move would be open to contractual employees in smaller firms that are more flexible rather than large corporations.