Every assessee who has total income of more than Rs. 250,000 has to pay tax, and file income tax return. There are distinct types of incomes that lawyers earn, which are taxable under different heads of income.
- Income from Practice
Many of the lawyers opt to practice law. Income derived from practice is taxable under the head of ‘income from profession.’ For the professionals, Government has introduced a new scheme of presumptive taxation from FY 16-17. Under the scheme, professionals can file their return declaring 50% of their gross receipts as income (if the professional income is upto Rs. 50 lakhs), and after deducting section 80 deductions, professionals need to pay tax on balance total income.
- Income from Advisory
Even non-practicing lawyers provide advisory services. Income from such advisory services are also considered as professional income. As per the new scheme of presumptive taxation for professionals (Section 44ADA), a non-practicing lawyer can’t opt for a such scheme because it is only for practicing legal professionals.
- Income from a law firm
If the lawyer is on payroll of a law firm, or is a partner of a law firm, then his income will be treated as ‘salary.’ If he is working on contract basis in his professional capacity, then the income from such an activity is considered as professional income. But again, if the lawyer is in practice, only then can he opt for presumptive taxation scheme. A professional partnership firm can also opt for such scheme if its professional income is upto Rs. 50 lakhs (for FY 16-17).
Three Benefits to File Returns under Presumptive Tax
- Easy to File: The tax form is much shorter and simpler as compared to a complex 30 page form for filing
- Save Money: Lawyers can now file tax returns on their own instead of paying a tax consultant. Typically, consultants charge anywhere from Rs. 5000 – 15000 for such filings
- Save Tax: Usually lawyers do not have much expenses to declare. By declaring 50% of income as profit and balance as expense, a lot of tax saving can be done.
Considerations for Audit and Foreign Income
Earlier, lawyers needed to file under ITR-4, but now lawyers can file under ITR-4 (Sugam) if they opt to file under presumptive taxation. They can file under ITR-4 (which is renamed as ITR-3 from FY 16-17), if they opt for normal provisions. If not, tax audit is applicable to them.
As per income tax laws, if gross receipts from profession exceeds Rs. 50 lakhs (from FY 16-17, earlier it was 25lakhs), then it is mandatory to get the books audited. However, professionals are mandated to keep books of account and get it audited if the income disclosed by professionals is less than 50% of gross receipts, and the total income exceeds Rs. 250,000.
Even if the lawyer is settled abroad and is providing services in India, he has to pay tax in India for earning income on his profession. Although, he can’t opt for presumptive taxation because the scheme is only for resident professionals and partnership firms.