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As a doctor, you are so busy with your schedule that you often have no time to undertake comprehensive financial planning. Consequently, you might end up paying a huge sum in taxes because of an absence of tax-saving investments, lack of proper maintenance of accounts and improper filing of ITR (income tax returns). However, you should give more attention to your taxation and overall financial planning.
If you are a doctor in India, sound tax planning can help you save a lot of income tax for doctors and increase your disposable income by reducing your tax liability. Even though there is no specific tax exemption allowed for professionals, including doctors in India, you can still avail benefits under the presumptive taxation scheme for computing income for professionals in India. The scheme is applicable for any profession such as medical, legal, engineering, architecture, accountancy, consultancy, interior designer, etc.
Apart from the presumptive taxation, as a doctor in India, you are also eligible for claiming tax benefits under Chapter VI-A (80C, 80D, etc.). Section 80C allows you to reduce your taxable income by investing in tax-advantaged investment schemes like guaranteed1 return plan, mutual funds, National Pension Scheme (NPS), etc.
However, to avail of the tax benefits for doctors in India, you must be careful of the following provisions:
If you are a doctor or a medical professional with an annual income of more than Rs 2.5 lakhs, you must file an income tax return. Your total income for tax filing will be inclusive of income earned from your profession, rental income, salary, interest income, capital gains, etc. You can calculate income from your practice or profession in two ways:
Consider your profession as a business activity and subtract the actual expenses from your receipts to calculate your profits
Opt for presumptive taxation
Once you know your total income, you can reduce your tax liability by claiming tax benefits under Section 80C for investments such as guaranteed1 return investment plan and more. However, apart from insurance tax benefits and other tax advantages claims under 80C, you would be liable to pay taxes on the remainder of your income.
If you want to calculate your presumptive taxation scheme, your income is presumed and actual profit is not calculated. In such a case, your profits are assumed to be 50% of your total professional receipts. However, doctors or any other professional with an income of Rs. 50 lakhs or less can opt for the presumptive taxation scheme.
If your annual income is above this limit, the law mandates you to report your income and then deduct the actual expenses to compute your annual profit or loss. In this case, your profits can be less or more than 50% of your total earnings.
Alternatively, in the case of presumptive taxation, you do not have to report or calculate your actual profits. The presumptive taxation scheme is only available to individuals and HUF. However, if you have your corporation or company, you cannot file take the presumptive taxation route.
Moreover, the presumptive taxation scheme is only available for residents of India. So, if you are an individual doctor practising in India, you can opt for this scheme.
Under this taxation scheme, you do not need to report your actual income or expenses for income tax calculation. Moreover, no tax audit is required if your professional income under the presumptive taxation scheme is more than 50% of the gross receipts.
If you opt to calculate your income under the presumptive taxation scheme, you are not required to maintain your books of accounts. You also do not incur any expense on hiring a chartered account for tax audits. Moreover, advance tax in the presumptive taxation option is not necessary.
Apart from these tax benefits of the presumptive taxation scheme, you are also free from paying any penalty under Section 271B of the Income Tax Act, 1961. This can help you save the fee you would have otherwise paid to a Chartered Accountant or an auditor.
That said, if you claim that your earnings from your practice are less than 50% of the gross receipts and your total income tops the maximum amount that is not chargeable to income tax, then, you have to maintain your books of accounts as per Section 44AA and also them audited from a chartered account and furnish the report under Section 44AB.
Under Section 44AA, doctors must maintain their books of accounts for income tax purposes. However, if your total income is not more than Rs. 1.5 lakhs in any of the last three years, you are not mandated to prepare your books of accounts.
Books of accounts that doctors must prepare under Section 44AA are:
Cashbook reporting day-to-day cash transactions and cash balance
Journal keeping your daily accounting records
Ledger recording all journal entries and for preparing financial statements
Copies of bills and invoices more than Rs. 25
Original receipts of all expenses for bills over Rs. 50
Duly signed payment vouchers in absence of invoices and receipts for more than Rs. 50
Other than these books of accounts, doctors must also keep the following documents to ensure they face no issue when filing their tax returns or claiming any tax benefits.
Keep a daily cash register in Form No. 3C recording details of patients, services offered, money received and receipt date
Inventory register with details of medicine stock, drugs and other medical consumables
Not maintain the necessary records might cause you to pay Rs. 25,000 as a penalty under Section 271A.
Further, as a practising doctor, if you earned over Rs. 50 lakhs during the last financial year, you will need to get your books of accounts audited by a practicing Chartered Accountant.
As a wise taxpayer, it is important to know provisions for income tax* for doctors to ensure you claim full available tax benefits for doctors in India. However, apart from following the above methods to minimize your tax liability, you should also take full advantage of other tax* benefits of up to Rs. 1.5 lakhs under Section 80C.
You can invest in a sound guaranteed investment plan ,like Tata AIA Life Insurance Guaranteed Return Insurance Plan (UIN-110N152V08) which provides guaranteed1 returns along with protection for your loved ones.
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1Guaranteed Returns/Payouts depend on Plan Option, Policy Term, Premium Payment Term and Age at entry
*Income Tax benefits would be available as per the prevailing income tax laws, subject to fulfilment of conditions stipulated therein. Income Tax laws are subject to change from time to time. Tata AIA Life Insurance Company Ltd. does not assume responsibility for tax implications mentioned anywhere in this document. Please consult your own tax consultant to know the tax benefits available to you.