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Profession Tax or Tax on Employment

Aashish Ramchand is the Co-founder of MakeMy Returns, an e-filing and online tax advisory website (recognized by Govt. of India). A chartered accountant by profession, he has worked with KPMG and JRC advisory both in international and domestic taxation respectively with a cumulative experience in taxation of more than 5 years. He has also completed CFA (USA) level 1 exam.

Professional Tax or Tax on employment [Sec. 16 (iii)]

As per Article 276 of the Constitution, Professional tax or Tax on Employment is levied by the state and is allowed as a deduction. The below mentioned factors are important with regards to this -

  1. Only the first year in which the Professional Tax is paid is permissible for Deductions.
  2. In some cases the company or firm in which the employee is employed pays the Professional Tax on behalf of the employee. In such cases, the tax is initially included as a Perk in the salary of the employee and the same is then deducted as Professional Tax from the total amount that forms the Gross Salary of the employee. This is done since the responsibility of paying this tax lies with the employee and not the employer.
  3. The Income tax does not have any provisions for a monetary upper limit. Article 276 of the Constitution states that a State Government cannot collect in excess of Rs. 2500 per year per employee as Professional Tax. The Income Tax Act states that the Professional Tax paid during the preceding year is subtracted.
  4. The illustration given below will help in understanding the entire concept of Professional Tax clearly – Mr. Sinha works for a company in Bangalore and is liable to pay Rs. 2000 per annum as Professional Tax. He pays a total of Rs. 4000 as Professional Tax on the 31st of May, 2011 of which Rs. 2000 is towards the tax for the financial year of 2010-2011 and Rs. 2000 is towards the tax for the financial year of 2011-2012. In the case of Mr. Sinha, the total amount deducted towards Professional Tax for the financial year 2011-2012 is actually Rs. 4000. Therefore, the reasoning that only Rs. 2500 is deductible towards Professional Tax does not stand true here.



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