Income Tax: Professional fees is different from salary; Know details

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Personally, it would probably make little or no difference whether you work in the capacity of a regular employee or a consultant with any organisation. However, the Income Tax department has made a clear demarcation when it comes to differentiating between salary and professional fees. They aren’t terms that can be used interchangeably as far as taxation is concerned. Now, suppose you’re 62 years old working as a consultant with an architecture firm. Your annual remuneration is below Rs 50 lakhs while the company deducts 10% TDS on the same. Before filing tax, understand why your income won’t be recognised as salary by the I-T department.

“Taxability of an income under the head ‘Salary’ establishes the existence of an employee and employer relationship. Before a payment can be taxed as salary, the relationship of employer and employee or master and servant must be proven. However, if engagement for any work is incidental to the exercise of the profession, the gains arising from such engagement shall not be chargeable to tax under the head Salaries but under the head ‘Profits and gains from business or profession,” said Tarun Kumar, chartered accountant and direct tax leader at Coherent Advisors.

Income received as fees from professional or technical services is categorised as income from business or profession, whereas in case of employment, it is considered as salary income. Here, one can choose to file the return under Section 44ADA of Income Tax Act, i.e., on a presumptive basis.

The Income-Tax Act allows specified professionals who are tax residents of India to calculate and pay tax on a presumptive basis. This scheme has been introduced to reduce the burden of compliances for specified professionals. Thus, if a professional opts for a presumptive tax scheme, he can pay tax on a presumption basis without maintaining the books of accounts.

Doctors, lawyers, architects, engineers, chartered accountants or similar professionals can opt for this scheme. For professionals, a presumptive taxation scheme is available under section 44ADA, provided the gross receipts from the profession do not exceed Rs 50 lakhs. The 50% of the gross receipts from such profession is deemed as presumptive income of the year.

“A person opting for the Presumptive Taxation under Section 44ADA is deemed to be have claimed deduction of all expenses. Any further claim of the deduction is not allowed after declaring the income @ 50% of sales. However, it is pertinent to note here that apart from deductions for business expenses, there are certain other deductions under chapter-VIA (tax savings investments like LIC & PPF, health insurance premium, education loan repayment, donations etc) as well which are allowed from the Gross Total Income. These deductions can still be claimed by the taxpayer,” Kumar explained.

An assessee opting for this scheme is exempted from maintenance of books of accounts related to such profession and get them audited from a chartered accountant.

“An assessee, who opts for the presumptive scheme under this provision, is also required to pay advance tax on his estimated total income. However, unlike other taxpayers where tax is payable in four instalments, the assessee can pay the entire advance tax due for the financial year on or before March 15 i.e. if you are a taxpayer opting for a presumptive taxation scheme under section 44ADA, you can pay for 100% of the advance tax in a single instalment up to March 15,” he added.

The professionals are subject to deduction of TDS at the rate of 10%, if the amount of TDS exceeds the actual tax liability, such excess amount can be claimed as a refund by filing an Income-Tax return. The taxpayers opting for a presumptive taxation scheme have to file an income tax return in form ITR 4.