Professional tax is charged by the respective Municipal Corporations. This tax is paid by every employee working in Private organizations. The tax is deducted by the Employer every month and remitted to the Municipal Corporation and it is mandatory like income tax, you get income tax exemption for this contribution. Professional tax or Employment tax is a state-based tax. It is allowed as a deduction from the gross income before computing the tax.
It is a statutory tax that state governments levy on professions, trades, callings, and employment. Professional Tax functionality in the SAP R/3 System only covers the Professional Tax applicable on employee salaries.
The system determines the professional tax payable by an employee, based on the following factors.
Professional tax basis – Comprises those salary components on which a professional tax is applicable. The salary components to be included for calculating the professional tax basis depend on the state.
The different components are
Medical Reimbursement – The system includes the medical reimbursement amount which exceeds the amount exempt from Income tax (as fixed under the Income Tax Act), as a part of the professional tax basis.
Housing Allowance – In case of a company leased or a company owned accommodation, the system checks the difference in housing allowance and the rent. If you pay an employee the positive difference between housing allowance and rent, then, the system includes this amount for calculating the professional tax basis.
Bonus – If the employment is in a state that specifies bonus as a component of the professional tax basis, then the system includes the same for professional tax basis calculations.