Money
Understanding professional tax in India
Summary
- Professional tax in India is state-specific and capped at ₹2,500 per year. While some states levy it every month, others do not levy it at all. Let us decode this tax and understand the compliances involved
The other day, I was sitting with two of my friends—one a consultant and the other an employee—when the conversation turned to taxes. My colleague, an employee, was surprised to learn that he had been paying a professional tax of ₹200 every month, automatically deducted from his salary by his employer. The consultant, on the other hand, was fully aware of this tax, as he had to handle the payments himself.
This discussion led us to explore the concept of professional tax in India, a tax that many, especially the self-employed, might not even realise they need to pay.
Professional tax is a state-imposed tax and is not just limited to professionals. Those earning an income through a profession, trade, or employment, whether salaried or self-employed, are liable to pay it.
“Professional tax is levied by state governments and is mandatory for individuals regardless of whether they are employees or self-employed professionals," explained chartered accountant Prakash Hegde. "In case of employees, a threshold will be given on the basis of income and in case of self employment, experience could be one of the criteria. The tax is capped at ₹2,500 per year, as stipulated by Article 276 of the Indian Constitution."
The tax operates differently for salaried employees and self-employed professionals or consultants. For salaried employees, the employer deducts the tax based on income slabs defined by each state and remits it to the state government on behalf of the employee. However, self-employed individuals, including consultants, must manage these payments on their own.
"Self-employed professionals have to register and pay the tax themselves, typically before 30 April every year," Hegde added.
This tax has been part of India's tax system since 1949, with the maximum limit initially capped at a mere ₹250 per annum. However, an amendment in 1988 raised this limit to ₹2,500, a figure that remains unchanged till date.
State variations
Article 276 gives state governments the authority to levy and collect professional tax. The way the tax is applied can differ significantly for states, leading to a complex web of rules and rates across the country.
Most states that levy professional tax have slab-based rates, meaning the amount you pay depends on your income (refer to the graphics).
In states like Maharashtra, Karnataka, and West Bengal, the tax is collected monthly, with the total annual amount capped at ₹2,500. However, some states, such as Delhi, Haryana, and Uttar Pradesh, do not levy professional tax at all. Thus, it is important to check your state's specific regulations.
Exemptions are available for certain individuals, such as senior citizens above 65 years of age, parents or guardians of mentally disabled children, individuals with permanent physical disabilities, and members of the armed forces.
"For self-employed and consultants with less than two years of experience, professional tax is not mandatory," Hegde said.
Paying professional tax
To pay professional tax, it is important to first register with your state’s tax department if you are self-employed. After registration, payments can usually be made online through the state’s designated portal. It is advisable to keep track of your payment deadlines to avoid any penalties or interest charges.
For example, in Maharashtra, the penalties for professional tax non-compliance are as follows: a late registration penalty of ₹5 per day, a monthly interest rate of 1.25-2.00% for late payment, a 10% penalty on the tax amount for non-payment or delays, and a penalty of ₹1,000 for late return submission.
Challenges in compliance
One of the challenges in paying professional tax is the process itself. Each state has a designated portal for tax payments, but technical issues sometimes make the payment process cumbersome.
"If you fail to pay professional tax, the tax department will send a reminder and a notice. Many a times, the notice may come after a few years as well," said Hegde. On the other hand, if you don’t have a GST number, it can be more challenging for authorities to detect non-payment, but the obligation remains.
It is important to note that professional tax cannot be offset against any other tax and must be paid in full. Many, particularly the self-employed, may be unaware of their obligation, but compliance is key to avoiding penalties.
Also Read: Will switching to a consulting role at ₹1 crore salary save you tax?
"Understanding and complying with professional tax regulations is essential to avoid penalties and ensure that you are on the right side of the law," Hegde said.
Conclusion
Professional tax is a significant part of the state tax system in India, applicable to anyone earning an income. Whether you are an employee or a self-employed professional, understanding how this tax works is vital to meeting your legal obligations and avoiding penalties.
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Professional tax is a state-imposed tax, meaning its rules and rates vary depending on where you live in India. For instance, in Maharashtra, the professional tax rate is ₹2,500 per year. This tax is directly deducted from the salaries of employees by their employers. However, when it comes to consultants and those engaged in business, the process is slightly different.
For consultants, there are two key options: "enrollment" and "registration". According to Balwant Jain, a tax and investment expert, "If you intend to work as a consultant, you need to register yourself as an employer before deducting professional tax from your employees." This registration allows you to comply with professional tax laws when you have employees under you.
Additionally, anyone carrying out any sort of business, regardless of its scale, is required to register themselves under the professional tax law. This is a crucial step that many business owners are unaware of. Jain further explains, "If you are carrying out a business, you need to enroll yourself under the professional tax law. For that, you need to enroll yourself and pay professional tax."
In summary, whether you are a consultant or a business owner, understanding and complying with professional tax regulations is essential. Neglecting to do so can result in penalties and legal complications. Make sure you are informed about your state's specific requirements and take the necessary steps to stay compliant.
