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Income from Profession – Rules & Computation

Doctors, Lawyers, CAs, Architects – your income isn't "Salary" or "Business" in the traditional sense. It's "Profession". The rules are similar to business, but accounting often differs.

Business vs Profession

  • Business: Purchase/Sale of goods, manufacturing, trade. Focus on Commercial Activity.
  • Profession: Earning livelihood using Intellectual Skill or manual skill (Vocation). Requiring qualification (e.g., MBBS, CA) or specialized talent (e.g., Artist, Musician).

Both are taxed under the same head: "Profits and Gains of Business or Profession" (PGBP).

Method of Accounting: Cash vs Mercantile

This is crucial for professionals!

  • Mercantile (Accrual): Record Income when earned, Expense when incurred. (Standard for Companies).
  • Cash System: Record Income when Received, Expense when Paid. (Allowed for Individuals/Professionals).

Most Professionals prefer Cash System.

  • Doctor completes surgery in March → Patient pays in April.
  • Cash System: Taxed in April (Next Year).
  • Mercantile: Taxed in March (Current Year).

Computation Format (Receipts & Payments Approach)

Professionals usually maintain a Receipts & Payments A/c instead of P&L. We convert it to Taxable Income.

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Specific Allowable Expenses for Professionals

  1. Books: Considered Capital Asset. Depreciation @ 40%. (Annual publications/journals are 100% revenue expense).
  2. Surgical Equipment: Plant & Machinery (15% depreciation). Life-saving medical equipment (40% in some old rules, now generally 15% unless specified).
  3. Study Tour/Conference: Expenses for attending professional conferences allowed.
  4. Professional Tax / Membership Fees: Allowed (e.g., ICAI/IMA fees).

Expenses Disallowed

  1. Personal Expenses: Car used for family (disallow proportionate % of fuel/depreciation).
  2. Donations: Not a professional expense.
  3. Capital Expenditure: Buying a clinic/office (Claim depreciation, not cost).

Practical Example

Dr. Strange (Receipts & Payments FY 24-25): Receipts:

  • Consultation Fees: ₹30,00,000
  • Gift from Patient: ₹50,000 (Taxable as Prof Income u/s 28)
  • Loan from Bank: ₹10,00,000 (Not Income)

Payments:

  • Clinic Expense: ₹8,00,000
  • Car purchased: ₹10,00,000
  • Car Expenses: ₹1,00,000 (20% personal use)
  • Books: ₹40,000

Solution:

  1. Gross Receipts: 30L + 50k = ₹30.5 Lakh.
  2. Less Expenses:
    • Clinic Exp: ₹8,00,000.
    • Car Exp: ₹1,00,000 * 80% (Biz use) = ₹80,000.
    • Depreciation on Car: 15% of 10L = 1.5L * 80% = ₹1,20,000.
    • Depreciation on Books: 40% of 40k = ₹16,000.
  3. Total Deductions: ₹10,16,000.
  4. Taxable Income: 30.5L - 10.16L = ₹20,34,000.

Alternatively, under Section 44ADA (Presumptive), he could declare 50% of 30.5L = ₹15.25L and pay tax on that (if receipts < 50L/75L).

Summary

  • Profession involves intellectual skill.
  • Professionals can use Cash System of accounting to defer tax on unpaid fees.
  • Receipts include fees, gifts from clients. Payments exclude personal/capital items.
  • Depreciation: Books (40%), Computers (40%), Surgical Equip (15%).
  • Presumptive 44ADA: 50% deemed profit if receipts < ₹50 Lakh.

Quiz Time! 🎯

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