Profession Tax: Check Exemptions, Deductions, And Refunds Explained

Professional Tax is not what the name suggests, it is not a tax simply levied only on ‘professionals’. Rather, it is a state-level tax in India that applies to individuals earning an income from practicing a profession, trade, calling, or employment. The responsibility for levying and collecting professional tax lies with the respective state governments, and the tax rates can vary from state to state. It is collected by the Commercial Tax Department of the state. Employers are typically required to deduct professional tax from their employee's salaries and remit it to the state government. Moreover, “Self-employed individuals are also liable to pay this tax and must do so according to the provisions set by their state's regulations,” informs Vikas Dahiya, Director of All India ITR.

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Professional Tax v/s Income Tax: What’s the difference?

“Professional tax is a state-specific statute, unlike income tax (which is a federal statute), and is levied by the State Governments as per Article 276 of the Constitution of India. Professional tax falls under the State List (List II) purview as per the Seventh Schedule of the Indian Constitution. As of now, the professional tax is applicable in 21 states and 1 union territory,” informs CA Aastha Gupta.

The central government collects income tax and is applicable across the entire country, with rates determined annually in the Union Budget. “While professional tax is a flat tax with maximum limits often set by the state, income tax is progressive, with varying rates applied to different income brackets. Thus, professional tax is specific to states and professions, while income tax is a broader national tax on overall income,” summarises All India ITR.

Are there any exemptions based on profession or income level?

All individuals, whether salaried or self-employed, earning beyond a certain threshold limit are liable to pay professional tax. This includes salaried employees, whose tax is typically deducted by their employers and remitted to the state government, and self-employed individuals such as doctors, lawyers, chartered accountants, and freelancers, who must pay the tax directly.

“The limits vary from state to state. It is a slab system. The maximum professional tax that any state government can charge is Rs. 2500 per annum,” says CA Aastha.

“Exemptions from professional tax vary by state but often include individuals earning below a certain income threshold, senior citizens, parents or guardians of children with disabilities, members of the armed forces, and disabled individuals. Some states also provide exemptions for specific professions, women exclusively engaged in certain occupations, and those engaged in agricultural activities,” informs Dahiya.

Given the variation in rules and exemptions across different states, it is important for taxpayers to refer state-specific regulations and determine liability and eligibility for exemptions.

How does professional tax vary across different states in India?

Professional tax varies across different states, with each state having the authority to formulate its laws, rates, and exemptions. The frequency of payment and the administrative processes involved in filing and remitting professional tax also vary from state to state. Additionally, all the states follow a slab system based on income to levy professional tax.

For instance, states like Maharashtra and Karnataka have structured professional tax slabs based on income levels, with a cap on the maximum annual amount, which is often around Rs 2,500. Kerala has eight slab rates with the highest being Rs 208 on a monthly salary above Rs 20,834, and the lowest being Rs 20 (professional tax) on wages between Rs 2,000 – Rs 2,999/month.

On the other hand, some states may have a flat rate for all professionals or provide additional exemptions for specific categories of individuals (mentioned above). Moreover, since Union Territories come under the administration of the Centre, they are exempt from paying this tax.

Can any expenses or deductions reduce the professional tax liability?

“Professional tax liability depends on the salary (in the case of employees) or gross income from the profession (in the case of self-employed individuals). There is no additional deduction provided to reduce the professional tax liability,” says CA Aastha Gupta.

“There is an exemption available under Section 16 of the Income Tax Act for individuals who have paid professional tax. However, this deduction is available only in case the individual opts to file the income tax return under the old scheme,” She further adds.

"Maximizing your tax benefits by leveraging professional tax payments as deductions in your income tax filings with ease and accuracy,” Dahiya emphasises.

Under what circumstances can one claim a refund on professional tax paid?

A refund on professional tax paid can be claimed under specific circumstances, typically arising from an overpayment or erroneous payment of the tax. For instance, if an employer mistakenly deducts and remits a higher amount of professional tax than required from an employee's salary, or if a self-employed individual pays more than the mandated amount due to an error, they may be eligible for a refund.

"While professional tax itself isn't refundable under Indian income tax law, it can be claimed as a deduction to reduce your taxable income. This can potentially lead to a tax refund if the tax deducted at source (TDS) or advance tax you paid exceeds your overall tax liability after claiming deductions. When filing your Income Tax Return (ITR), ensure you claim the professional tax you paid during the financial year in the designated section for deductions. This will lower your taxable income and potentially result in a tax refund." says, Vikas Dahiya, Director of All India ITR.

What is the process for claiming a refund?

The process for claiming a refund on professional tax paid typically involves the following steps:

- First, the taxpayer or employer must identify the reason for overpayment or erroneous payment of the tax and gather supporting documentation, such as salary slips, bank statements, or proof of exemptions, to substantiate the claim.

- Second, they need to prepare a formal refund application addressed to the state tax department, including details such as the amount overpaid, the period for which the overpayment occurred, and the reasons for the refund request. This application is usually accompanied by relevant documents verifying the claim.

- Once the application is complete, the concerned party will submit it to the appropriate tax authority either electronically or through physical submission, depending on the state's procedures.

- The tax department then reviews the application and supporting documents to verify the claim's validity.

- Next, if the claim is approved, the tax department processes the refund and disburses the amount to the individual or employer through the chosen mode of payment, such as direct bank transfer or cheque.

“There is no standard refund mechanism of professional tax paid. It varies from state to state. For example, in the case of the state of Telangana, the refund will be determined by the assessing authority by examining Form 29 filed by the assessee,” CA Aastha Gupta states.

What records should be maintained for professional tax purposes?

All India ITR lists the following documents that you should keep handy for professional tax payments:

Registration Documents: Keep a copy of your professional tax registration certificate for your reference.

Payment Receipts: Always maintain official receipts for all professional tax payments made throughout the year. This includes online payment confirmations or physical receipts from designated offices.

Income Records: Document all your income sources, including invoices raised, contracts signed, and payments received. Maintain a record of the dates and amounts for each transaction.

Expense Records: Track all business-related expenses incurred throughout the year. This includes receipts for travel, office supplies, equipment rentals, and any other professional costs.

“Having categorized expense records helps in maximizing deductions and lowering your taxable income. By maintaining these key documents one can be well-equipped to accurately calculate the professional tax liability and claim all applicable deductions while filing the ITR. This not only minimizes errors but also potentially reduces your overall tax burden,” states Vikas Dahiya, Director of All India ITR.

Are there any penalties/violation consequences for not paying professional tax?

Failing to comply with professional tax regulations can lead to a series of financial penalties, which vary depending on the state’s legislation. These mistakes can put you under professional tax-related penalty:

- Late registration: This can incur a daily penalty, while late payment may be subject to monthly interest.

- Non-payment or delayed payment of professional tax may also lead to additional penalties, making timely compliance crucial to avoid financial repercussions. “Each state may have a different penalty amount, for instance, in Karnataka the punishment for breaking the professional tax requirements for a registered employer or individual fails is a penalty not to exceed 50 per cent of the amount of the unpaid tax, plus interest of 1.25 per cent each month. In Tamil Nadu, however, a 10 per cent extra penalty is imposed for failure to pay professional tax,” informs Vikas Dahiya, Director of All India ITR.

- Wrong Information: If employers or individuals supply fraudulent or erroneous information, they must pay a penalty equal to three times the amount of tax payable.

Remember, the professional tax is an important consideration for freelancers and self-employed individuals in India. It's crucial to register with your state's authorities and fulfil your professional tax obligations. While the tax itself isn't refundable, one can claim it as a deduction while filing the income tax return, effectively reducing your taxable income and potentially lowering your overall tax liability. “However, the process can be tedious and overwhelming, therefore, a quick fix is to refer to online apps while filing your income tax returns,” says Vikas Dahiya, Director of All India ITR.