Profession Income refers to earnings made by professionals like doctors, lawyers, and accountants.
If this income falls under the designated tax brackets, it becomes taxable, and timely payment of taxes will become mandatory.
The following occupations are under the purview of professional income tax:
- Lawyers
- Doctors
- Engineers
- Architects
- Accountants
- Any technical advisers
- Interior Designers
- Filmmakers
- Chartered Accountants
- Any other authorised individuals.
The advantage of Presumptive Tax under Section 44ADA is that it cannot be used if a person’s professional receipts exceed Rs. 50 Lakhs. A professional Chartered Accountant would perform the audit, and the individual would be required to file an ITR or income tax return and provide a profit and loss account and balance sheet to the Income Tax Authority.
Compliances that must be fulfilled if Professional Income Exceeds Rs. 50 Lakhs
The following compliances must be met if the professional receipts exceed Rs. 50 lakhs:
1. Creating the books of accounts, the balance sheet, and the profit and loss account
In order to submit an income tax return using the ITR 3 form, a person must have adequate books of accounts, a balance sheet, and profit and loss statements for every financial year in which their professional receipts exceed Rs. 50 lakhs.
- Section 44AB audit to be done by a Chartered Accountant who is practising
He would also need to have an income tax audit performed by a licenced and practising chartered accountant if the annual receipts exceed Rs. 50 lakhs. The CA will confirm all the information and examine copies of all invoices before preparing the audit report, which must be filed with the income tax return.
- Deduction of TDS from Payments
TDS must also be deducted from costs because the annual receipts exceed Rs. 50 lakhs. The individual would also need to get a TAN No. in order to deduct and deposit the TDS.
The Income Tax Act requires the aforementioned compliances to be fulfilled. In addition to the aforementioned compliances, the individual would also need to comply with GST laws if their receipts exceeded Rs 20 lakhs per year.
Calculating income and the related taxes
In this instance, the income would not be calculated on a presumptive basis but rather on an actual basis, i.e.
Income or the final profit would be revenue or the receipts minus expenses minus depreciation.
The person would need to retain a copy of all costs in order to be qualified to claim expenses and depreciation.
After the income is calculated, income tax is applied in accordance with the income tax slab rates, with the highest slab rate of 30% being applicable.
How to Reduce Income Taxes on Professional Income
The individual may also be eligible for the following deductions, including:
- Home loan deductions
- Section 80C Deductions
- Tax deductions for student education loans and
- Health insurance deductions (premium paid)
List of Income Tax Deductions is a comprehensive list of all the deductions that may be claimed.
Note: In most circumstances, the income tax still turns out to be excessively high even after claiming all costs and the advantage of deductions. Smart people have begun forming corporations in tax havens like Dubai and pay Zero Tax on their Income to save money on taxes.
Professions Presumed to Be Taxed Under the Income Tax Act
These professions have access to a unique provision under Section 44ADA that allows them to file their taxes in accordance with the income tax regulations.
Professionals with gross receipts of up to Rs. 50 lacs are eligible to provide 50% of their income as taxable income under this Section.
As a result, only 50% of his income would be subject to income tax calculations (because income tax is only applied to net profit amounts), the other 50% of his income would be tax-free.
The advantage of receiving benefits under this programme is that business owners are relieved of the need to maintain accounts and books for audits. However, if the individual reports earnings that are less than 50% of gross revenues, they are not entitled to Section 44ADA benefits.
They will be required to handle accounts and records, file taxes under Section 44AA, and have them frequently audited.
5 Heads of Income under Income Tax
1. Income from Salary
The compensation that a person receives on a regular basis for providing services pursuant to an express or implicit contract is referred to as a salary.
For the purpose of calculating revenue from Salary, the Salary consists of:
- Wages
- Pension
- Annuity
- Gratuity
- Advance payment of salary Fees
- Commissions
- Perks, and
- Profits in lieu of or in addition to salaries or wages
- The annual addition to the balance of a recognised provident fund
- Leave encashment
- Transferred balance of recognised provident fund
- Contribution by the Central Government or any other Employer to Employees
- Pension A/c as mentioned in Section 80CCD.
2. Income from House Property
The charging Section here is Section 22.
Income from residential property will be taxed; residential property can be any structure or piece of land.
The greater of the following shall constitute the gross annual value of the real estate:
- Anticipated rent
- After eliminating unrealized rent but subtracting loss from vacancy, the actual rent is collected or due.
Other Deductions
- Municipal (Communal) taxes
- Section 24(a) Standard Deduction
- The permitted deduction is 30% of the net yearly value of the real estate owned.
- Section 24(b) deals with interest on borrowed money.
- Actual interest paid on money borrowed for rental properties
- Self-occupied property: Up to Rs. 2 lakhs in interest on capital borrowed is permitted as a deduction. If the purchase or building of the home property is finished within five years, the deduction should be permitted.
- A Financial Products year may only set off a maximum of Rs. 2 lakhs in losses; any further losses may be carried over for a total of 8 years.
3. Income from Profits and Gains from Business or Profession
The revenue listed below is subject to taxation under the heading “Profits and Gains of Business or Profession” in accordance with Section 28:
- Gains and Profits from Any Business or Career.
- Any remuneration or other payments due to or received by any of the individuals listed in Section 28 (ii).
- a trade, professional, or other similar association’s revenue from certain services given to its members.
- The worth of any perk or advantage received as a result of doing business or practising a profession, whether or not it can be converted into money.
- Any interest, pay, bonus, commission, or other compensation a partner receives from the company.
- Inventory’s fair market value as of the day it is converted into, or considered as, a capital asset, as determined in accordance with the approved procedure.
- Speculative transaction income.
Income from Capital Gains
Under the provisions of the Income Tax Act of 1961, all income received from movable or immovable capital assets is taxable under the heading Capital Gains.
- Short-Term Capital Gain
If a capital asset is sold within 36 months of purchase and shares or securities are sold within 12 months of purchase, the gain from the sale is considered a short-term capital gain and is included in the taxpayer’s income after commission and other selling costs have been deducted.
Taxability
According to Section 111A of the Income Tax Act, when equity shares or equity-oriented funds are sold on the stock exchange, and a securities transaction tax is due, the short-term capital gain that results from the sale is subject to tax at a rate of 10% up until the assessment year 2008-09 and 15% starting with the assessment year 2009-10.
- Long-Term Capital Gain
According to Section 111A of the Income Tax Act, the short-term capital gain that comes from the selling of equity shares or equities-oriented funds on the stock market is liable to tax at a rate of 10% up to the assessment year 2008-09 and 15% commencing with the assessment year 2009-10.
Following the advantage of indexation explained above, the long-term capital gains are taxed at a rate of 20%. Long-term capital gains from Sections 80C through 80U are not deductible. However, in cases where a person’s or HUF’s income is less than the basic exemption limit, the shortfall in the basic exemption limit is offset by long-term capital gains.
5. Income from Other Sources
Any income that is not explicitly taxed under another head of income will be taxed under the “Income from Other Sources” head.
- Dividends, Section 56(2)(i)
- Gambling or betting winnings of any kind, including those from lotteries, crossword puzzles, horse races, card games, and other games, are always taxed under this heading.
- Interest Earnings
- Gifts that a person receives.
Indian economy is filled with professionals today. They are helping the economy develop and strengthen itself. Hence, the new professionals should be educated about income tax and how their incomes will be taxed along with various possibilities attached in that.
