In India, taxpayers have to pay different types of taxes at various levels, including state and central governments – including both direct and indirect taxes. Indirect tax includes GST and VAT etc., whereas direct tax includes rules like income tax. An example of direct tax is professional tax, which is imposed by state governments in the country. Although it is not discussed as much as income tax, professional tax is very important for those who earn income from their profession, in those states where this tax is levied. Knowing about this will ensure legal compliance and give you more clarity about financial planning. What is professional tax, who should pay it and which states collect it. Let us discuss this in detail..
What is professional tax?
Professional tax is a type of direct tax that state governments impose on people or companies doing profession, trade or employment. This is taken as a percentage of the income earned. Although employers deduct professional tax from the salaries of their employees, self-employed people have to pay it directly to the state governments.
Under Article 276 of the Indian Constitution, the amount of professional tax cannot exceed Rs 2,500 every year. Professional tax exemption is available under the Income Tax Act, 1961, which reduces your taxable income and your total tax liability. Since this is a state-level tax, its structure may vary from state to state.
Not all states of India impose professional tax
States imposing professional tax include Andhra Pradesh, Assam, Bihar, Chhattisgarh, Gujarat, Karnataka, Kerala, Madhya Pradesh, Maharashtra, Manipur, Meghalaya, Mizoram, Odisha, Puducherry, Tamil Nadu, Tripura, West Bengal and Jharkhand.
States and UTs that do not levy professional tax include Arunachal Pradesh, Delhi, Goa, Haryana, Himachal Pradesh, Jammu and Kashmir, Nagaland, Punjab, Rajasthan, Sikkim, Uttar Pradesh, Uttarakhand, Andaman and Nicobar, Chandigarh, Daman and Diu, Dadra and Nagar Haveli, and Lakshadweep.
Who has to pay professional tax?
Any person who earns income from any profession is required to pay professional tax to the states that levy it. This includes salaried employees and professionals like doctors, lawyers and consultants.
Salaried individuals – Employees working in both government and private companies have to pay professional tax. Professionals – People working in professions like doctors, lawyers, architects, chartered accountants etc. have to pay professional tax.
Business Owners — In many states, self-employed people and entrepreneurs also have to pay professional tax. However, professional tax is not applicable on people earning less than a certain amount. The exact limit of exemption is different in different states.
Is professional tax part of your CTC?
For salaried people, professional tax is a deduction from your gross salary. This is not part of your CTC, which is the cost of your company hiring you.
Rather, according to ClearTax, professional tax is a deduction from your take-home salary. It is calculated every month on the basis of your gross salary for that month.
Income tax vs professional tax
Although both income tax and professional tax are direct taxes, there are many differences between them. Income tax is imposed by the Central Government on the earnings of any person or organization in the financial year. The income tax rate depends on the tax slab of the taxpayer, which is decided by the government. This tax is applicable throughout India and is imposed on those people and institutions who earn a certain amount. The more you earn, the more the tax increases and there is no maximum limit.
In contrast, professional tax is imposed by some state governments on the gross salary of working people, professionals and business owners. It is based on profession or trade. Professional tax is levied in some states and there is exemption on it in some. The maximum limit of professional tax is Rs 2,500.
Professional tax is usually paid every month, while income tax is usually paid every year. Income tax has rising slabs, whereas professional tax has fixed slabs which vary according to the state. Income tax is paid through self-filing or TDS, while professional tax is deducted by employers from salaried people.