Paying associate therapists in India

Start here, because it invalidates most of what you will read elsewhere

The Income-tax Act, 1961 was repealed with effect from 1 April 2026. The Income Tax Department’s own portal puts it plainly:

Yes. The 1961 Act stands repealed on the 01.04.2026.

The Income Tax Act, 2025 does not impose any new tax.

Income Tax Department, e-filing portal, on the objective and scope of the new Act

Almost every Indian article about paying a clinician tells you to deduct under “section 194J”. That section belongs to a statute that no longer exists. The substance mostly carried over, the numbering did not. So this page explains the mechanism and deliberately does not print new section numbers, because we could not verify them against the official text and a wrong citation on a page you act on is worse than none.

First question: employee or contractor

This is decided by what actually happens, not by what the contract is called. The Supreme Court, in a case about a doctor engaged by a hospital, was explicit that there is no single test:

No one test of universal application can ever yield the correct result. It is a conglomerate of all applicable tests taken on the totality of the fact situation in a given case that would ultimately yield whether the contract is a contract of service or a contract for service.

Sushilaben Indravadan Gandhi v. New India Assurance Co. Ltd., Supreme Court of India, 2020

The other half of the test is integration: is the person part of the business, or merely working for it. And there is an older case, about tailors paid per piece who could work elsewhere and decline work, in which they were nonetheless held to be employees, because the employer could reject the finished work and require it to be redone. Translate that to a practice that mandates a protocol or can require an assessment to be done again.

Things that quietly destroy a contractor classification: a guaranteed minimum, paid leave of any kind, a probation period, a disciplinary procedure, a post-termination non-compete, a “reporting manager”, and you setting the client’s fee without the therapist’s agreement.

Getting it wrong is expensive in a way that is easy to miss. Social security thresholds count heads. If several misclassified “contractors” are added to your admitted staff, you can cross a threshold you believed you were under, and the liability then attaches to everyone, not only to the people who were misclassified. India’s four Labour Codes were brought into force in November 2025, which changes the framework this sits in.

The gate nobody mentions: you may owe no TDS at all

The duty to deduct does not fall on everyone who makes a payment. It falls on a defined category of payer. Broadly, that category is:

• any person other than an individual or a Hindu Undivided Family, so a company, an LLP, a partnership firm or a trust, always; and
• an individual or HUF only if, in the immediately preceding year, their business turnover or professional receipts exceeded the prescribed limits.

Read what that means for a real practice. A sole practitioner whose own professional receipts last year were below the threshold has no obligation to deduct on payments to an associate. Not a reduced obligation. None. Most small Indian practices are in exactly this position and deduct nothing, entirely lawfully, while worrying that they should.

And the corollary, which catches people: it is usually your legal form, not your size, that creates the obligation. A practice that incorporates for liability or branding reasons becomes a deductor on the same day, with the same clients and the same revenue.

If you do deduct, what follows

The sequence is mechanical, and the order matters because two of these must happen before the first payment:

• Get a tax deduction account number first. A PAN is not sufficient. Applying late carries its own penalty.
• Collect the associate’s PAN before you pay them. Without it the rate rises sharply, and the shortfall is yours, not theirs.
• Deposit by the 7th of the following month, with a longer window for deductions made in March.
• File the quarterly statement and issue the associate their certificate, which is what lets them claim the credit. Fail to issue it and you have taken their money and given them nothing to show for it.
• Interest runs for failure to deduct and, at a higher rate, for deducting and not depositing.
• The real sting is disallowance. Where tax is not deducted or not paid on a resident payment, a substantial portion of that expenditure is disallowed in computing your own income. On a large associate cost that is a much bigger number than the tax was.

One thing worth telling your associate, because almost nobody does: if their actual tax liability will be low, they can apply for a lower or nil deduction certificaterather than financing the government all year and reclaiming later. That is the real answer to “this deduction is killing my cash flow”.

The part that actually costs money: which way the money flows

A sixty-forty split can be written two ways, and people treat them as the same deal described differently. They are not the same deal.

If the practice collects and pays the therapist a share, the money is the practice’s revenue, and the therapist’s share is the practice’s cost. Where the healthcare exemption applies, the tax authority has already addressed exactly this, in the context of hospitals retaining part of what a patient pays:

Services provided by senior doctors/ consultants/ technicians hired by the hospitals, whether employees or not, are healthcare services which are exempt.

The entire amount charged by them from the patients including the retention money and the fee/payments made to the doctors etc., is towards the healthcare services provided by the hospitals to the patients and is exempt.

CBIC Circular No. 32/06/2018-GST, 12 February 2018, serial number 5

If instead the therapist collects and pays the practice a facility fee, that circular does not help you, because you are no longer supplying healthcare to a patient. You are supplying something to the therapist: rooms, administration, referrals. On the face of it that is a taxable supply.

And here is the compounding that makes it expensive. If the therapist’s own income is exempt, they cannot recover the tax charged on that facility fee. Input credit is blocked where it is attributable to exempt supplies. So the tax is not a wash. It is a dead cost, deducted from a therapist doing economically identical work.

On a practice billing twenty-four lakh rupees a year through a sixty-forty split, the difference between the two directions runs to well over a lakh a year, purely from which name is on the client invoice. There is a second effect too: introducing a facility fee can mean the practice is no longer making exclusively exempt supplies, and registration is then tested against turnover that includes the exempt therapy income.

Choose the structure on liability first, not tax

The tax follows the structure. Do not let it pick the structure. The prior question is who contracts with the client, because that decides who owes the duty of care, who holds the clinical record, who is answerable for a complaint, and who keeps the client if the therapist leaves.

What belongs in the agreement, whichever way you go:

• No exclusivity, and an express right to practise elsewhere, if you intend a contractor relationship.
• Clinical autonomy stated plainly. Any oversight framed as clinical governance and peer review, never as supervision or performance management of a person.
• The therapist invoices you and is paid against invoice, not on a payroll cycle.
• The therapist carries their own professional indemnity insurance and their own registration, named in the agreement.
• No paid leave, no gratuity, no bonus, no notice pay, said expressly rather than left to silence.
• The split expressed as consideration for identified services, itemised, never as a share of profits. An undifferentiated percentage invites both a tax officer and a labour authority to characterise it however suits them, and a profit share can attract an entirely separate form of assessment.
• Who owns the clinical record, who is the data fiduciary, and what happens to the client relationship on exit. This clause does more classification work than the label clause, because it says whose business the client belongs to.
• Who bears cancellation and no-show risk. If you absorb all of it, your contractor bears no entrepreneurial risk and starts to look like staff.

Note one thing that applies regardless of classification: obligations under the workplace sexual harassment law reach people engaged on a contractual basis, not only employees, and an internal committee is required once a workplace reaches the prescribed number of workers. Practices routinely miss this because they think of themselves as having no employees.

What is genuinely unresolved

• Whether psychology or counselling counts as a notified profession for tax purposes. It is not on the statutory list, and we found no notification, circular or judgment resolving it. Notably, the authorities once thought it necessary to notify physiotherapistsexpressly in order to bring them in, which suggests allied clinical work is not automatically inside “medical profession”. This governs presumptive taxation eligibility and the book-keeping rules, and arguably the deduction category itself.
• Which deduction category an associate payment falls in if it is not professional services. The plausible alternatives carry materially different rates.
• Whether a facility fee charged by a practice to a clinician is exempt or taxable. No ruling found in either direction. Prudence points to taxable.
• Whether taking online bookings and payments makes a practice an e-commerce operator for tax purposes, which would change who deducts and who accounts for tax. Genuinely open, and consequential for anyone using a booking platform.
• The current status of some employment statutes under the new Labour Codes. Sources we checked contradicted each other, so we have not stated numbers.

What to take to your accountant

• What legal form is my practice, and does that make me a person required to deduct?
• What were my professional receipts last year, and does that cross the threshold?
• Under which category do payments to a psychologist fall, and what is the current section reference and rate?
• Given how my associates actually work, is any of them at risk of being treated as an employee?
• If we run a revenue split, which direction should the money flow, and what does each direction cost once tax is included?
• Do I need a tax deduction account number, and by when?

Sources

• Primary: Income Tax Department, objective and scope of the new Act (the repeal of the 1961 Act)
• Primary: CBIC Circular No. 32/06/2018-GST, 12 February 2018 (the retention money clarification quoted above)
• Primary: Sushilaben Indravadan Gandhi v. New India Assurance Co. Ltd. (the employee versus contractor test)
• Primary: Code on Social Security, 2020

About this guide

We wrote this because a practice owner taking on their first associate gets almost no useful help, and what does exist now cites a repealed Act. We have deliberately not printed section numbers from the new Act: we could reach the Income Tax Department’s portal for the repeal itself, but not the official text for the new numbering, and we would rather describe the rule correctly than cite it wrongly.

We are not chartered accountants or lawyers, and we are not authorised to advise on Indian tax or employment law. We have not seen your arrangements. This is general information about how the rules are structured, as at 1 September 2026. Classification is fact-specific by design, because the Supreme Court has said no single test decides it, so nothing here can tell you your answer.

If you spot an error, write to collective@therapistandco.com and we will correct it and date the correction.

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