In India, taxpayers are required to pay various types of taxes at multiple levels, including the state and central government, both direct and indirect. Indirect taxes include GST and VAT, while direct taxes include regulations such as income tax. One example of a direct tax is professional tax, which is levied by state governments across the country. Although it is not discussed as often as income tax, professional tax is crucial for those who earn income from their professions in states where it is taxed. Understanding it will ensure legal compliance and provide greater clarity regarding financial planning. What is professional tax, who must pay it, and which states levy it? Let's discuss this in detail.

What is professional tax?
Professional tax is a type of direct tax levied by state governments on individuals or companies engaged in a profession, trade, or employment. It is levied as a percentage of income earned. While employers deduct professional tax from employees' salaries, self-employed individuals are required to pay it directly to state governments.

Under Article 276 of the Indian Constitution, the amount of professional tax cannot exceed ₹2,500 per year. Under the Income Tax Act, 1961, professional tax exemptions are available, which reduce your taxable income and lower your total tax liability. Because it is a state-level tax, its structure may vary from state to state.

Not all states in India impose professional tax.
States that impose 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 Union Territories that do not impose 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 is required to pay professional tax?
Any individual who earns income from a profession is required to pay professional tax to the states that impose it. This includes salaried employees and professionals such as doctors, lawyers, and consultants.

Salaried individuals—Employees working in both government and private companies—are required to pay professional tax. Professionals — People working in professions such as doctors, lawyers, architects, chartered accountants, etc., are required to pay professional tax.

Business Owners — In many states, self-employed individuals and entrepreneurs are also required to pay professional tax. However, professional tax does not apply to those earning less than a certain amount. The exact exemption limit varies from state to state.

Is professional tax part of your CTC?
For salaried individuals, professional tax is a deduction from your gross salary. It is not part of your CTC, which is your company's expense for employing you.

Rather, according to ClearTax, professional tax is a deduction or reduction from your take-home pay. It is calculated each month based on your gross salary for that month.

Income Tax vs. Professional Tax
Although income tax and professional tax are both direct taxes, there are several differences between them. Income tax is levied by the central government on an individual's or entity's income during a financial year. The rate of income tax depends on the taxpayer's tax slab, which is determined by the government. This tax is applicable throughout India and is levied on individuals and entities earning a certain amount. The more you earn, the higher the tax, and there is no maximum limit.

In contrast, professional tax is levied by some state governments on the gross salary of employed individuals, professionals, and business owners. This tax is based on the profession or trade. Some states impose a professional tax, while others provide exemptions. The maximum limit for professional tax is ₹2,500.

Professional tax is usually paid monthly, while income tax is usually paid annually. Income tax has increasing slabs, while professional tax has fixed slabs that vary by state. Income tax is paid through self-filing or TDS, while professional tax is deducted by the employer from salaried individuals.

Disclaimer: This content has been sourced and edited from TV9. While we have made modifications for clarity and presentation, the original content belongs to its respective authors and website. We do not claim ownership of the content.