Income tax for lawyers and advocates

Income tax for lawyers and advocates in India is primarily governed by the Income Tax Act, 1961.1 As professionals, their income is generally taxed under the head "Profits and Gains of Business or Profession." Here's a breakdown of the key aspects:

1. Head of Income:

• Income earned by lawyers and advocates from their professional practice (e.g., legal fees, consultation charges, appearance fees) is taxed under the head "Profits and Gains of Business or Profession."

2. Methods of Accounting:

• Legal professionals can maintain their accounts on a cash basis or mercantile basis. Most professionals prefer the cash basis as income is recognized when received and expenses when paid.

3. Deductions and Allowable Expenses:

Lawyers and advocates can claim various expenses incurred wholly and exclusively for the purpose of their profession. Common allowable deductions include:

• Office Expenses: Rent, electricity, water, maintenance, internet, telephone bills.

• Professional Books and Periodicals: Cost of legal books, journals, and subscriptions to legal databases.

• Conveyance Expenses: Travel expenses for attending court, client meetings, etc. (excluding personal travel).

• Salaries and Wages: Payments to staff (e.g., clerks, paralegals, assistants).

• Depreciation: On assets used for the profession like computers, office furniture, professional library, vehicles.

• Legal Expenses: Any legal fees incurred by the advocate for their own professional purposes.

• Stationery and Printing: Cost of paper, ink, printing of briefs, etc.

• Membership Fees: To professional bodies like the Bar Council.

• Other Miscellaneous Expenses: Any other expenditure genuinely incurred for carrying out the legal profession.

Important Note: Expenses of a personal nature or capital nature are generally not allowed as deductions.

4. Presumptive Taxation Scheme (Section 44ADA):

To simplify tax compliance for small professionals, the Income Tax Act provides Section 44ADA, which lawyers and advocates can opt for.

• Eligibility:

  • Applicable to resident individuals, Hindu Undivided Families (HUFs), and partnership firms (excluding Limited Liability Partnerships5 - LLPs).

  • Gross receipts from the specified profession should not exceed ₹75 lakh in a financial year (this limit was increased from ₹50 lakh in recent budgets).

  • "Specified professions" include legal, medical, engineering, architectural, accountancy, technical consultancy, interior decoration, and other notified professions.

• How it works:

  • If eligible and opting for this scheme, the professional can declare 50% of their gross receipts as their taxable income.

  • They are not required to maintain detailed books of accounts or get them audited, provided they declare income at or above the 50% threshold.

  • If they declare a lower profit than 50% of gross receipts, and their total income exceeds the basic exemption limit, they are required to maintain books of accounts and get them audited.

  • New Rule (post-Budget 2025 clarifications): Taxpayers opting for presumptive taxation must declare the higher of the prescribed percentage (50% for professionals) OR their actual profit earned in the financial year. This ensures that those earning more than the deemed percentage contribute their fair share.

5. Tax Deducted at Source (TDS) on Legal Fees (Section 194J):

When businesses or specified individuals pay legal fees to lawyers or law firms, TDS provisions under Section 194J of the Income Tax Act apply:

• Applicability: TDS is applicable on payments made for professional services, which explicitly include legal services.

• Threshold: If the aggregate payment to a lawyer/advocate/law firm exceeds ₹50,000 in a financial year, TDS must be deducted.

• Rate: The standard TDS rate for legal fees is 10%. If the payee does not furnish their PAN, TDS is deducted at 20%.

• Payer's Responsibility: The person or business making the payment is responsible for deducting TDS and depositing it with the government.

• Exemptions: Individuals or HUFs not liable for a tax audit are generally exempt from deducting TDS for personal purposes.

6. Goods and Services Tax (GST) on Legal Services:

Legal services are generally subject to GST in India, primarily under the Reverse Charge Mechanism (RCM).

• GST Rate: The standard GST rate for legal services is 18% (SAC Code 9982).

• Reverse Charge Mechanism (RCM):

  • For most legal services provided by an individual advocate or a firm of advocates (excluding senior advocates) to a business entity located in the taxable territory, the recipient (the business entity) is liable to pay GST under RCM. This means the advocate/firm typically does not need to collect GST from such business clients.

  • Consequently, individual advocates and law firms providing services exclusively to businesses under RCM may not be required to obtain GST registration if their only supplies are those on which tax is payable under RCM.

• Forward Charge Mechanism (FCM):

  • Senior Advocates: If a senior advocate provides legal services to another advocate or a law firm, GST is applicable under the Forward Charge Mechanism (FCM), meaning the senior advocate must charge and collect GST.

  • If an advocate or law firm provides non-legal services (e.g., non-legal consultancy), or services to international clients, or their turnover from taxable services under FCM (e.g., senior advocate to another advocate/firm) exceeds the threshold, they might need to register under GST and pay GST under FCM.

• Exemptions from GST:

  • Legal services provided by an individual advocate or a firm of advocates to:

    • Another individual advocate or firm of advocates.

    • A senior advocate.

    • A business entity whose aggregate turnover in the preceding financial year was below the GST registration threshold.

    • Any government entity, local authority, or non-business entity.

  • Services provided by a senior advocate to:

    • A business entity whose aggregate turnover in the preceding financial year was below the GST registration threshold.

    • Any government entity, local authority, or non-business entity.

7. Income Tax Return (ITR) Form:

• Lawyers and advocates generally file their income tax return using ITR-3 (if they do not opt for presumptive taxation and have income from business or profession) or ITR-4 (Sugam) if they opt for the presumptive taxation scheme under Section 44ADA.

Understanding these provisions is crucial for legal professionals to ensure compliance, optimize their tax liabilities, and manage their finances effectively. It is always advisable to consult with a Chartered Accountant for personalized tax planning and filing.