Section 44ADA of Income Tax Act: Presumptive tax for professionals

Many people are under the misconception that income generated by freelancing activities are not taxable. Similarly, plenty of individuals are unaware that professionals, consultants, and freelancers can pay income tax on half of their gross annual earnings. This is what Section 44ADA of the Income Tax Act is all about. Section 44ADA was added to the IT Act in 2017 as part of the presumptive taxation scheme. This section was introduced with the objective of reducing the burden of tax compliance on self-employed professionals.

Section 44ADA of Income Tax Act: What is it?

Section 44ADA of the Income Tax Act was added to provide small professionals with a simpler method of taxation. It covers a scheme of presumptive taxation of gains and profits earned from professions highlighted under Section 44AA(1) of IT Act of 1961. Under the rules of Section 44ADA, small taxpayers are not required to maintain a book of accounts and their profits can be calculated as a percentage of gross receipts or total turnover during a financial year. The presumptive taxation scheme presumes profits to be 50% of the total turnover. Under this scheme, specified professionals with gross annual income of below Rs 50 lakh were allowed to take advantage of Section 44ADA from April 1, 2017, onwards.

See also: Presumptive tax scheme under Section 44AD of Income Tax Act

Section 44ADA of Income Tax Act: Budget 2023 update

The presumptive taxation limit under Section 44ADA has been revised for FY 2024 in Union Budget 2023. This limit has been increased from Rs 50 lakh to Rs 75 lakh, provided that 95% of the gross receipts are through online modes.

Section 44ADA of Income Tax Act: Key objectives

Here’s the purpose of Section 44ADA of ITA:

• To reduce the burden of tax compliance on self-employed professionals
• To simplify taxation for small self-employed professionals
• To simplify the process of doing business for small self-employed professionals
• To extend the simplified presumptive taxation scheme to specified professionals as it was only applicable for small businesses earlier.

Section 44ADA of Income Tax Act: Eligibility

Only those who meet all three of these conditions are eligible.

• Indian assessees falling under the categories of individuals, partnership firms (with the exception of limited liability partnerships), and Hindu undivided families (HUFs)

• Professionals whose total annual turnover is under Rs 75 lakh, provided that 95% of the gross receipts are through online modes

• Only the professionals engaged in following professions are eligible:
  • Interior decorations
  • Engineering
  • Technical consulting
  • Accounting
  • Medical
  • Legal
  • Architecture
  • Movie artists (including producers, actors, editors, directors, art directors, dance directors, music directors, cameramen, lyricists, story writers, singers, costume designers, and dialogue or screenplay writers)
  • Authorised representative
  • Other professionals specified by the Central Board of Direct Taxes (CBDT)

Section 44ADA of Income Tax Act: Rate of tax

Under Section 44ADA of ITA, the income of eligible professionals is presumed as 50% of the total turnover during the applicable fiscal year. This has been deduced by assuming that the expenses incurred during a year are lower as compared to self-employed businessmen. The section also permits eligible self-employed professionals to declare a higher income than 50% of the gross receipts, if they want.

How is presumptive income calculated?

To opt for presumptive taxation scheme under Section 44ADA, these three conditions should be met:

• The gross receipts should not exceed Rs 75 lakh
• 95% or more of the gross receipts should be through online modes
• 50% or more of the gross receipts should be reported as income in the ITR

Let’s take an example to clearly understand the calculation of presumptive income under Section 44ADA.

Assuming that your gross annual income is Rs 60 lakh, all of which is received through UPI payments. Under the presumptive tax scheme, the 50% of your gross income is deemed to be your net taxable income, amounting to Rs. 30 lakh.

Can one opt out of presumptive tax scheme?

Unlike the restrictions put on businesses that have opted for the presumptive tax scheme under Section 44AA, professionals eligible under Section 44ADA can opt in and out of the presumptive tax scheme any time they want. In short, in contrast to the 5-year restriction placed on certain kinds of tax assessees, such restrictions are not applicable to professionals covered by Section 44ADA.

Should one opt for presumptive tax scheme?

Whether or not it’s beneficial to opt for the presumptive tax scheme is something that varies on a case-to-case basis. While the scheme might benefit an individual, it may not be the best choice for someone else. Let’s look at an example to make it easier for you to decide the best option for yourself.

Let’s assume that a graphic designer named Nikhil earns gross receipts of Rs 60 lakh in a particular financial year. Let’s further assume his total expenses during the year amounted to Rs 20 lakh. This makes his annual net profit equal to Rs 40 lakh.

If Nikhil opts out of the presumptive tax scheme under Section 44ADA:

• He pays tax on Rs 40 lakh as per the applicable tax slab rate.
• He has to maintain the books of accounts.

If Nikhil opts for the presumptive tax scheme under Section 44ADA:

• He pays tax on Rs 30 lakh as per the applicable tax slab rate.
• He doesn’t have to maintain the books of accounts.

In this scenario, opting for the presumptive tax scheme is the more beneficial choice for Nikhil.

Similarly, you can calculate your own income and net profit to choose the best option for yourself.

Section 44ADA of Income Tax Act: Key Points

Section 44ADA of the Income Tax Act provides the benefit of presumptive taxation for professionals, simplifying the tax computation process. However, there are important considerations to keep in mind while filing taxes under this section. Here are some key points:

• Advance tax: Professionals availing presumptive taxation under section 44ADA must pay their advance tax by March 15 of the previous year to avoid interest charges under section 234C.

• Maintenance of books: Professionals under section 44ADA are not required to maintain detailed books of accounts or undergo audit, unless they declare income lower than 50% of gross receipts.

• Depreciable assets: Depreciation claims cannot be separately made under section 44ADA. Instead, a 50% ad hoc deduction is allowed on gross receipts. However, the written down value (WDV) of depreciable assets is calculated as if depreciation has been claimed under section 32 of the Act.

• Opting out of section 44ADA: If professionals believe their income is lower than 50% as per presumptive taxation, they can choose not to opt for this scheme. In such cases, they are subject to the provisions of section 44AA and section 44AB, requiring proper bookkeeping and audit by a Chartered Accountant.

Section 44ADA of Income Tax Act: Benefits

The key benefits of the presumptive tax scheme under Section 44ADA include:

• It simplifies the tax filing process as the tax form for filing under Section 44ADA is much shorter and simpler than complex ITR forms.
• There is no need for maintaining books of accounts, simplifying the entire taxation process even further.
• In case of professionals who do not have many expenses to declare, taxpayers can declare 50% of their income as expense and potentially reduce tax liability and save money.
• There is no requirement for getting your accounts audited under Section 44AB of the ITA.

See also: Do professionals have to maintain books under Section 44AA?

Section 44ADA of Income Tax Act: Exemptions

Professionals covered under Section 44ADA will be permitted the following:

• Eligible individuals will be entitled to all deductions covered under Section 30-38, including unabsorbed depreciation and allowances.
• The WDV or written down value of depreciable assets will be calculated again after deduction of allowed depreciation.

Provision for salaried individuals

In many cases, salaried professionals choose to freelance to generate extra income. In these cases, the income generated through freelancing is added with the salary income to determine the gross income earned during a particular financial year. This total income is liable for taxation as per the applicable tax rate. For instance, if your annual salary income is Rs 20 lakh and annual freelance income is Rs 10 lakh, you can opt for the presumptive tax scheme. Here, you can choose to add only half of the freelance earnings to your total income. If you do this, your total taxable annual income will amount to Rs 25 lakh.

Things to remember

When choosing the presumptive taxation scheme, it’s essential to keep the following things in mind.

• Carefully consider your actual expenditure. It’s advisable for professionals with a low net profit to avoid opting for the presumptive tax scheme.
• Under Section 44ADA, you cannot deduct remuneration paid to partners from the presumptive income.
• Even if a firm does not adopt the presumptive tax scheme, its partners can opt for it.
• Professionals who opt for this scheme are free to opt out of it any time they want to.

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