What is Employment Tax or Professional Tax – Deduction under Sec 16(iii) of Income Tax

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Check out What is Employment Tax or Professional Tax ? and Deduction under Sec 16(iii) of Income Tax. many salaried employees or professionals can observe the term Employment Tax or Professional Tax in their payslips or Form 16 as deduction from their salary / professional income. If you don’t now about this Employment Tax or Professional Tax, don’t worry. Today in this article we explain What is Employment Tax or Professional Tax, Who levies it, Who collects it, How much tax, who has to pay, consequences of violation of employment / professional tax regulation and other details.

Also Read : Chartered Accountants Minimum Fee Chart for Professional Services

What is Employment Tax

A person earning an income from salary are required to pay this Employment Tax to the state government of India as mentioned below tax rates. In India, Employment Tax is imposed every month. However, not all states impose this tax. Different states have different Employment Tax rates and methods of tax collection.

What is Professional Tax

A person earning an income from practicing a profession such as CA (chartered accountant), CS (company secretary), lawyer, doctor, IT Engineer etc. are required to pay this Professional Tax. It is the tax by the state governments in India. Different states have different rates and methods of Professional Tax collection. In India, profession tax is imposed every month. However, not all states impose this tax.

Article 276 of the Constitution

What is Employment Tax or Professional Tax - Deduction under Sec 16(iii) of Income TaxUnder the Sixtieth Amendment of the Constitution of India, Clause (2) of article 276 of the Constitution specifies that the total amount payable in respect of any one person to the State or to any one municipality, district board, local board or other local authority in a State by way of taxes on trades, professions,  callings and employments leviable by a State Legislature under clause (1) of that article shall not exceed two thousand and five hundred rupees per annum.

The provision to that clause, however, enables the continuance of the levy of such tax at a rate exceeding Rs.2500/- per year in any State, municipality, etc., if in the financial year immediately preceding the commencement of Constitution there was in force in that State, municipality, etc., any such tax exceeding that rate.

Who levies Employment Tax or Professional Tax

As mentioned earlier, not all states impose this tax. Different states have different tax rates and methods of collection in India. This Profession Tax or Employment Tax is levied by particular Municipal Corporations and majority of the states of India impose this duty. This Tax is a source of revenue for the state governments.

The states which impose professional tax are

  • Andhra Pradesh
  • Assam
  • Kerala
  • Telangana
  • Punjab
  • Karnataka
  • Bihar
  • Tamil Nadu
  • Meghalaya
  • Odisha
  • Tripura
  • Gujarat
  • Madhya Pradesh
  • Jharkhand
  • West Bengal
  • Maharashtra
  • Sikkim

Tax Rate on Employment / Professional Tax

The Employment Tax or Professional Tax is a slab-amount based on the gross income of the salaried and professional and as well as the other states as may be decided employees. It is deducted from salary of the employee or professional every month. In case of a company, directors of a company, partnerships, individual partners, self-employed professional or owners of any business undertaken in the state, Employment Tax or Professional Tax is to be submitted depending upon their gross turnover in the preceding year. In some cases, the payment of tax is fixed and is to be paid irrespective of turnover.

For example in state of West Bengal, owner of a factory has to pay professional tax only if the preceding year turnover is greater than 5 lac rupees and in case of companies there is a mandatory payment of rupees 2,500 /- each year as professional tax irrespective of turnover.

The maximum amount of Employment Tax or Professional Tax payable per year is Rs. 2,500

Employment Tax or Professional Tax Deductions

Deductions under Income Tax : As per section 16(iii) of Income Tax Act, Tax on employment, profession, trade, etc. levied by a State under Article 276 of the Constitution will be allowed as deduction on cash basis, whether paid by employee or by employer (on behalf of employee) from gross taxable salary.

Note: If employer (on behalf of employee) pays Professional tax then:

  • Firstly, it is to be included as taxable perquisite; and
  • Further, it is allowed as deduction u/s 16(iii).

Deduction under Sec. 16(iii) of Income Tax Explained

ILLUSTRATION

Mr. Rohit a non-Government employee has the following salary details :

  1. Basic Salary Rs. 5,000 p.m.
  2. D.A. Rs. 2,000 p.m.
  3. Entertainment Allowance Rs. 300 p.m.
  4. Professional tax paid by employee Rs. 600
  5. LIC Premium paid by employer Rs. 3,600
  6. Income tax paid by employee Rs. 2,000
  7. Professional tax paid by employer on behalf of employee Rs. 1,600

Find his taxable salary.

Solution

Computation of taxable salary Mr. Rohit for the A.Y.2019-20

ParticularsDetails (Rs)Amount (Rs.)
Basic Salary60,000
Allowances
Dearness Allowance24,000
Entertainment Allowance3,60027,600
Taxable perquisite
Professional tax paid by employer1,600
LIC Premium paid by employer3,6005,200
Gross Taxable Salary92,800
Less: Deduction u/s
16(ia) Standard Deduction40,000
16(ii) Entertainment allowance (Assessee is a Non-government employee)Nil
16(iii) Professional Tax (Rs. 1,600 + Rs. 600)2,2002,200
Taxable Salary50,600

Penalties for Non-Compliance on Employment or Professional Tax Payment

Delays in obtaining Registration Certificate, a penalty of Rs. 5/- per day. In case of non/late payment of Employment Tax or Professional Tax, penalty will be 10% of the amount of tax. In case of late filing of returns, a penalty of Rs. 1000 per return will be imposed if you filed after due date in 1 month. After 1 month, a penalty of Rs. 2000 will be imposed.

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