Taxation for Professionals: A Comprehensive Guide

Introduction

Taxation for professionals in India is governed by two important acts. The Income Tax Act, 1961, and the Income Tax Rules, 1962. The tax laws categorize professionals into two groups: those carrying on specified professions as well as those carrying on non-specified professions. This article provides a detailed overview of the various taxation for trades, answers important questions like what is Section 44ADA, and also the requirements for income tax return filing for professionals, and everything else that you need to know regarding about taxation for Doctors, lawyers, CAs, etc.

Specified Professions

Professions such as engineering, law, architecture, accounting, medicine, and technical consulting come under specified professions. They all fall under the umbrella of taxation for trades, be it taxation for Doctors or lawyers or engineers etc. Hence, they are required to maintain books of accounts as per Rule 6F of the Income Tax Rules. The requirement applies only if their gross receipts exceed Rs. 1.5 lakhs in any of the three immediately preceding years. Hence, if a professional starts their practice in a particular year and their receipts exceed Rs. 1.5 lakhs for that year, they are also required to maintain accounting records for that year.

The accounting records that need to be maintained include:

• Cash Book: A record of all cash receipts and also payments to track cash balance.
• Journal: A log of all day-to-day transactions, recording debits as well as credits.
• Ledger: A book where all entries flow from the journal, providing detailed account information.
• Photocopies of bills and receipts: For transactions valued above Rs. 25.
• Original bills and receipts: For transactions valued above Rs. 50.

Medical professionals must maintain additional records, including:

• Daily case registers: Details of patients, fees received, services provided, as well as date of receipt.
• Stock details: Daily records of medicines and also consumable items.

Non-Specified Professions

Even professionals who don’t fall under Taxation for trades, such as those who are in non-specified professions need to maintain books of accounts if their income exceeds Rs. 2.5 lakhs or gross receipts are more than Rs. 25 lakhs in any one of the three immediately preceding years.

Computation of Taxable Income

To calculate taxable income for Taxation for trades, under the head “Profits and Gains from Business or Profession,” professionals need to deduct profession-related expenses from gross receipts. These expenses can include salary, rent, internet as well as mobile expenses, official travel, and lunch expenses.

Example:

Archana, an interior designer, received a gross revenue of Rs. 15 lakhs for the FY 2017-18. Her profession-related expenses were:

• Internet and mobile: Rs. 25,000
• Salary: Rs. 3 lakhs
• Rent: Rs. 1.5 lakhs
• Lunch expenses: Rs. 24,000
• Travel expenses: Rs. 1.5 lakhs

Hence, her taxable income would be calculated as follows:

Gross receipts: Rs. 15,00,000

(-) Profession-related expenses:

• Internet and mobile: Rs. 25,000
• Salary: Rs. 3,00,000
• Rent: Rs. 1,50,000
• Lunch expenses: Rs. 24,000
• Travel expenses: Rs. 1,50,000
  Net income: Rs. 8,51,000

This income will be added to other taxable income and then the authorities will tax it at applicable rates.

Tax Filing

Professionals must file their tax returns for Taxation for trades using Form ITR 3 on or before July 31 of the assessment year. This is unless they are subject to an audit under the Income Tax Act.

Tax Audit

Professionals are liable for a tax audit if their gross revenue from it exceeds Rs. 25 lakhs during any given financial year. If you don’t get your books audited, then you can attract a penalty of up to 0.5% of gross revenue, limited to Rs. 1.5 lakhs.

Deductions and Exemptions

Professionals can claim various deductions as well as exemptions to reduce their taxable income. Some common ones include:

• Section 80C: Deduction of up to Rs. 1.5 lakhs for investments such as PPF, NSC, ELSS, etc.
• Section 80D: Deduction of up to Rs. 25,000 for health insurance premiums (Rs. 50,000 for senior citizens)
• Section 80E: Deduction for interest paid on education loans
• Section 24: Deduction of up to Rs. 2 lakhs for interest paid on housing loans
• Standard Deduction: A flat deduction of Rs. 50,000 for salaried professionals

Advance Tax

If a professional’s estimated tax liability under the umbrella of Taxation for trades for the year exceeds Rs. 10,000, they must pay advance tax in four installments – June 15, September 15, December 15, and March 15. Failure to pay advance tax can attract interest as well as penalties.

TDS (Tax Deducted at Source)

Professionals need to deduct tax at source on certain payments made to contractors, sub-contractors, rent, as well as professional fees, etc. They must also deposit tax deducted with the government within the prescribed time.

Form 16A

Professionals who deduct TDS must issue Form 16A to the deductees, certifying the TDS deducted and also deposited. This form is one of the essential Documents Required for Income Tax Return filing for professionals. Deductees must have it to claim credit for the TDS.

Presumptive Taxation

Additionally, when it comes to Taxation for trades, professionals with gross receipts up to Rs. 50 lakhs can opt for presumptive taxation under Section 44ADA. What is Section 44ADA about you ask? Well, it’s the section that provides the presumptive tax scheme, it further states the net profit is deemed to be 50% of the gross receipts. Also, no books of accounts need to be maintained. However, the option is only available for specified professions like medicine, engineering, legal, etc.

Conclusion

Specific rules and regulations govern taxation for trades in India. Apart from knowing the steps for ITR Filing For Business Owners, knowing the income tax return filing steps for professionals is also equally important for entrepreneurs. Primarily because many businesses themselves employ a lot of professionals. Professionals need to maintain accurate accounting records, claim eligible deductions, comply with TDS and advance tax requirements, and also file their tax returns on time to avoid penalties and ensure compliance with tax laws. Seeking guidance from a tax professional can help you navigate the complexities of the tax system as well as optimize tax savings.