What is professional tax and who needs to pay it? Is it part of your CTC? All you need to know

In India, taxpaying individuals have to pay different kinds of taxes — both direct and indirect — at many levels including the state and the centre. Indirect taxes include GST and VAT among others, while direct tax includes provisions like income tax. One example of a direct tax is professional tax, which is levied by state governments in the country.

While it is not discussed as widely as income tax, professional tax is crucial for individuals earning incomes from their professions in states where this tax is levied. Knowing about it will ensure legal compliance while giving you more clarity on financial planning.

Here is everything you need to know about what is professional tax, who should pay it, and which states charge it.

What is professional tax?

Professional tax is a type of direct tax levied by state governments on individuals or entities engaged in professions, trades, or employments. It is charged as a percentage of income earned.

While employers deduct the professional tax from employees’ salaries, it needs to be paid directly to state governments by self-employed individuals.

The amount of professional tax per year cannot exceed ₹2,500 under Article 276 of the Indian Constitution. Professional tax is deductible under the Income Tax Act, 1961, reducing your taxable income and lowering your overall tax liability. Since this is a state-level tax, the structure can vary from state to state.

Professional tax is not levied by all states in India.

States that levy 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 UTs that do not levy professional tax include — Arunachal Pradesh, Delhi, Goa, Haryana, Himachal Pradesh, Jammu & Kashmir, Nagaland, Punjab, Rajasthan, Sikkim, Uttar Pradesh, Uttarakhand, Andaman and Nicobar, Chandigarh, Daman and Diu, Dadra and Nagar Haveli, and Lakshadweep.

Who needs to pay professional tax?

Any individual earning income from a profession is mandated to pay professional tax to states those who charge it. This includes salaried employees and professionals like doctors, lawyers, and consultants.

• Salaried individuals — Employees working in both government and private companies need to pay professional tax.
• Professionals — Individuals working in professions such as doctors, lawyers, architects, chartered accountants, etc. need to pay professional tax.
• Business owners — In many states, self-employed individuals and entrepreneurs are also required to pay professional tax.

However, professional tax is not applicable to individuals earning below a certain amount. The exact exemption limit is different across states.

Is professional tax part of your CTC?

For salaried individuals, professional tax is a deduction against your gross salary. It is not a part of your CTC, which is the cost your company bears to employ you.

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

Income tax vs professional tax: Are they the same?

While income tax and professional tax are both direct taxes, they have many differences.

Income tax is levied by the central government on the earnings of an individual or entity over the financial year. The rate of the income tax depends on the taxpayers tax slab, which is determined by the government. This tax is applied all across India and is levied on individuals and entities who earn a certain amount. The more you earn, the tax increases and there is no maximum limit.

In contrast, professional tax is levied by certain state governments on the gross salary of employed individuals, professionals and business owners. It is based on profession or trade. Professional tax is charged in certain states and is exempt in others. The maximum threshold of professional tax is ₹2,500.

Professional tax is usually paid monthly, while income tax is usually paid yearly. Income tax has progressive slabs, while professional tax features fixed slabs with state-wise variation. Income tax is paid via self-filing or TDS, while professional tax is deducted by the employer from salaried individuals.

Thus, knowing about these taxes help you plan your finances better and gives you clarity on how much of your earnings should be set aside for paying them. Having clarity on different types of taxes also ensures legal compatibility.