Professional tax is claimed under one of two heads of income, depending on how you earn. If you draw a salary, it comes off under the head “Income from Salaries” through Section 16(iii) of the Income Tax Act, 1961. If you are self-employed or run a business, it comes off under the head “Profits and Gains of Business or Profession” through Section 37(1). The section you rely on, the way the deduction is computed, and whether it survives the new tax regime all turn on this classification.
Why the Head Matters
Section 14 of the Income Tax Act, 1961 sorts all taxable income into five heads: Salaries; Income from house property; Profits and gains of business or profession; Capital gains; and Income from other sources.1India Code. The Income Tax Act, 1961 – Section 14 Heads of Income Each head carries its own rules for computing income and claiming deductions. Professional tax, though levied by state governments, is deductible when you compute your central income tax, and the head under which you claim it decides which section of the Act applies to you.
For Salaried Employees: Section 16(iii)
If you receive a salary, professional tax is deducted under the head “Income from Salaries.”2Income Tax Department. Income from Salary Section 16(iii) allows you to subtract the full amount of professional tax paid during the year from your gross salary. The provision describes it as a deduction for any sum paid on account of a tax on employment within the meaning of Article 276(2) of the Constitution.3Income Tax Department. Section 16 – Deductions from Salaries
The deduction sits alongside two other Section 16 adjustments: the standard deduction of ₹50,000 (₹75,000 under the new tax regime from Assessment Year 2025-26) and the entertainment allowance deduction available only to government employees. Professional tax reduces your gross salary before taxable income is calculated, so you are not taxed again on money that already went to your state.
Only amounts actually paid during the financial year qualify. Where an employer deducts professional tax from your wages, the deduction still counts for you because it was paid out of your salary. If the figure your employer deducted does not match what appears on your Form 16, reconcile it before filing.
For Self-Employed Individuals and Businesses: Section 37(1)
Freelancers, independent professionals, and business owners claim professional tax under the head “Profits and Gains of Business or Profession.” Section 37(1) allows a deduction for any expenditure laid out wholly and exclusively for the purposes of the business or profession, provided it is not capital in nature and not a personal expense.4Indian Kanoon. Section 37(1) in The Income Tax Act, 1961
Professional tax fits because it is a mandatory cost of carrying on the trade or profession. A chartered accountant, doctor, lawyer, or shopkeeper who pays professional tax to the state deducts it as a business expense when computing profits. The amount reduces net income under that head, which in turn lowers overall tax liability.
When You Have Both Salary and Business Income
The two treatments run in parallel. Professional tax linked to your employment is claimed under Salaries via Section 16(iii). Any professional tax you pay separately for your business or professional activity is claimed under Business or Profession via Section 37(1). Keeping the payments and receipts separate makes filing cleaner and preserves both deductions.
Professional Tax Under the New Tax Regime
The head you fall under has a real consequence under Section 115BAC, the new tax regime. For salaried employees, the professional tax deduction under Section 16(iii) is not available in the new regime. Since the new regime became the default from Assessment Year 2024-25, a salaried employee who has not actively opted out cannot claim professional tax against salary income. The standard deduction (₹75,000 under the new regime from AY 2025-26) continues, but the separate Section 16(iii) deduction does not.
For self-employed individuals, the position is different. Section 37(1) deductions are part of computing business income itself, not a separate exemption stripped away by the new regime. Expenses incurred wholly and exclusively for the business, including professional tax, remain deductible. That is the practical significance of the “which head” question: a salaried employee loses the deduction under the new regime, while a self-employed person keeps it.
If you are salaried and your professional tax outgo is meaningful, compare your total liability under both regimes before filing. The old regime lets you claim professional tax along with your other deductions, and depending on your overall profile the arithmetic may favor it.
How Employers Treat Professional Tax in Their Books
Employers face a related classification question, and the answer depends on who bears the cost.
When an employer deducts professional tax from employee wages and remits it to the state, the employer is acting as a collection agent. The amount is not an expense for the business. It sits on the balance sheet as a current liability under “Duties and Taxes Payable” until it is sent to the state treasury, at which point the liability clears.
When an employer voluntarily pays professional tax on behalf of employees as an additional benefit, the cost is the employer’s own. It is recorded as an indirect expense on the profit and loss account, reducing net profit for that period. Under income tax law, this employer-paid professional tax is treated as a perquisite in the employee’s salary, but Section 10(10CC) provides that the tax paid by the employer on a non-monetary perquisite is not treated as further income in the employee’s hands, so no cascading effect arises.
Getting the entry right matters for accurate statements. A liability, being money collected from employees and owed to the state, is not the same as an expense, which is money spent from the business’s own pocket. Mixing them distorts both the balance sheet and the profit figure.
Quick Reference
- Salaried employee, old regime: deduct professional tax under “Income from Salaries” via Section 16(iii).
- Salaried employee, new regime (Section 115BAC): the Section 16(iii) deduction is not available.
- Self-employed professional or business owner, either regime: deduct professional tax under “Profits and Gains of Business or Profession” via Section 37(1).
- Both salary and business income: split the deduction by source, each going under its own head.
- Employer deducting from wages: current liability, not an expense.
- Employer paying on employees’ behalf: indirect expense on the P&L, with Section 10(10CC) preventing a cascading tax on the employee.
Professional tax itself is a state levy authorized by Article 276 of the Constitution, and not every state imposes it. That side of the picture governs whether you owe the tax and how much; the head-of-income question governs how you claim what you have already paid when you file your central income tax return.