What Is Professional Tax & Who Needs To Pay It?

In India, taxpayers have to deal with different kinds of taxes, such as direct and indirect taxes, at many levels; the state and the center are also included. Indirect taxes include GST and VAT, among others. Direct taxes include provisions such as income tax. Another such example of a direct tax is professional tax, which is levied by the state governments in India.

Although the Professional tax is not discussed as widely as income tax for individuals earning income from their profession in states where this type of tax is levied. Knowing about the professional tax will ensure legal compliance while giving you more clarity on financial planning.

This blog will cover everything you need to know about professional tax, who should pay it, and which states charge it.

What Is Professional Tax?

Professional tax is a type of direct tax imposed by the state government on entities and individuals engaged in professional trades or employment in the state. It is charged as a percentage of income earned.

While employers deduct the professional tax from employees' salaries, self-employed individuals need to pay it directly to the state government.

Under Article 276 of the Indian Constitution, the amount of professional tax per year cannot exceed Rs 2500. The professional tax is deductible under the Income Tax Act, 1961, which reduces your overall taxable income and lowers your liability once and for all. Since this is a state-level tax, the strictness of this tax varies from state to state.

Just know that the professional tax is not imposed by every state.

States that levy the professional tax include Andhra Pradesh, Assam, Bihar, Chhattisgarh, Gujarat, Karnataka, Kerala, Madhya Pradesh, Maharashtra, Meghalaya, Manipur, Puducherry, Mizoram, Odisha, Tamil Nadu, Tripura, West Bengal, and Jharkhand.

The states and the union territories that do not impose professional taxes include Arunachal Pradesh, Goa, Haryana, Himachal Pradesh, Jammu and Kashmir, Rajasthan, Punjab, Sikkim, Uttarakhand, Uttar Pradesh, Andaman and Nicobar Islands, Daman and Diu, Chandigarh, Dadra and Nagar Haveli, and Lakshadweep.

Who Needs to Pay Professional Taxes

Any individual earning income from a profession needs to pay professional tax, provided they are living in the states where it is charged. This includes salaried employees and professionals, such as consultants, doctors, and lawyers.

Salaried individuals such as employees working in both private and government companies are required to pay professional taxes.

Professionals such as doctors, lawyers, architects, chartered accountants, etc. need to pay professional tax.

Business owners in many states, self-employed individuals, and entrepreneurs are also required to pay professional tax.

However, ensure that the professional tax is not imposed on individuals earning below a certain amount. This exemption limit varies across states.

Is Professional Tax Part Of Your CTC

For salaried individuals, professional tax is deducted from your gross salary. It is not a part of your CTC, which is the cost of your company because it employs you.

Rather, the professional tax is a deduction or a reduction from your in-hand salary with respect to ClearTax. It is calculated every month based on your gross salary for that month.

Income Tax Vs Professional Tax - Are They the Same?

Income tax and professional tax are both direct taxes, but they have many differences. The income tax is imposed by the central government on the earnings of an individual or entity over the financial year. The rate of the income tax is based on the taxpayer's tax slab, which is determined by the Indian Government.

The tax is applicable across India and is imposed on individuals and entities that earn a certain amount. The more you earn, the higher the tax, and there is no cap.

Where the professional tax is imposed by the state government, the gross salary of the professional, employer, individual, and business owner. It is based on the profession. The professional tax is charged in certain states and is exempted in others. The maximum amount for the professional tax is Rs 2500.

This type of tax is generally paid monthly, while income tax is paid annually. Income tax, on the other hand, has progressive slabs while the professional tax has fixed slabs with state-wise variation. Income tax is paid via filing taxes or TDS, while the professional tax is deducted by the employer from salaried individuals.

Understanding these taxes will help you plan your finances and your taxes in a smart way; they will also provide you with clarity on how much of your earnings should be set aside for paying them. Having clarity on different types of taxes also ensures a sense of legal compliance.

While both the professional tax and the income tax contribute to government revenue, they are fundamentally different in their governance and applicability. The following table illustrates the key differences.

The Bottom Line

Property tax and income tax both serve different purposes: the former is a state-level tax imposed on profession, while the latter is a central government tax on income. Complying with these taxes not only ensures legal adherence but also offers tax-saving opportunities.

As an NRI, if you are seeking professional assistance with income tax filing in India and managing professional tax, Savetaxs is the name to trust. Connect with us as we serve our clients 24/7 across all time zones.