Professional Tax
Professional tax is a state-level levy on the income of individuals engaged in employment, professions, trades, or callings; it is capped at ₹2,500 per year and is fully deductible from gross salary income under Section 16(iii) of the Income Tax Act.
Professional tax is governed by individual state legislation and is not a central government levy. States such as Maharashtra, Karnataka, West Bengal, Tamil Nadu, Gujarat, Andhra Pradesh, and Telangana impose professional tax; many states including Delhi and Rajasthan do not levy it. The constitutional authority for states to impose professional tax flows from Article 276 of the Constitution, which imposes a ceiling of ₹2,500 per year per person.
For salaried employees, the employer deducts professional tax from the employee's salary on a monthly or periodic basis and deposits it with the state government. This makes it similar in mechanism to TDS, though it is a state tax rather than an advance income tax. For self-employed professionals — chartered accountants, lawyers, doctors, architects — the individual directly registers and pays professional tax to the state authority.
The tax slabs vary significantly across states. Maharashtra, for instance, has monthly slabs ranging from nil (salary up to ₹7,500) to ₹200/month (salary above ₹10,000). Karnataka's slabs go up to ₹200/month for salaries above ₹15,000. West Bengal levies up to ₹2,500 annually on higher earners.
Section 16(iii) of the Income Tax Act explicitly allows the deduction of professional tax actually paid during the year from gross salary income. This deduction is available under the old tax regime. Under the new tax regime (Section 115BAC), Section 16 deductions are not available, which means that professional tax does not reduce taxable income for employees who opt for the new regime — a factor to consider when comparing regimes.
Employers who pay professional tax on behalf of employees (a benefit some offer) must include the amount as a perquisite and then the deduction under Section 16(iii) is available. The gross-up and deduction effectively net to zero for the employee in such cases.
For professionals registering under state professional tax acts, there are also enrollment fees and annual certificate renewal requirements. Non-compliance attracts penalties and interest under state law.