Section 44ADA- What is the Presumptive Tax Scheme for Professionals
The Income Tax Return (ITR) is a form used by the individuals and entities to submit their yearly Section 44ADA of the Income Tax Act: People frequently believe that money earned from freelancing work is not subject to taxes. Similarly, a lot of people are not aware that professionals, consultants, and freelancers are required to pay income tax on half of their gross annual income. The Income Tax Act's Section 44ADA offers a special Presumptive Taxation Scheme (PTS) designed specifically for professionals. For qualified professionals, this programme streamlines tax calculations and compliance, resulting in ease of doing business. We'll examine the specifics of Section 44ADA in this post, including qualifying requirements, exclusions, and its effects on various professions.
Table of Content
What is Section 44ADA of the Income Tax Act?
Section 44ADA provides a unique provision for determining the income and gains of small professions. To include specific specialists in the streamlined presumptive taxation structure, Section 44ADA was enacted. The presumptive tax scheme was previously limited to small enterprises. The presumptive taxation model makes doing business easier and lessens the regulatory load for small professions. Profits are assumed to be 50% of gross receipts under the presumptive tax structure.
Taxpayers are not required to keep accounting records under the aforementioned clause. It is also possible to calculate the profit as a proportion of the total sales made throughout a fiscal year. In any case, the assessee will have to keep accounting records if their total income exceeds the exemption threshold and their income is earned at a rate lower than 50% of the receipt. He or she will also need to get audited. It is important to remember that professionals are required to pay taxes on any earnings they get from clients who are based abroad.
Section 44ADA- Examples of Eligible Assessees
The Indian assessees listed below are qualified for Section 44ADA:
Individuals
Partnership companies (notice that partnerships with limited liability are not eligible)Â
Professionals working in the following fields are qualified:Â
Accounting
Engineering
Architecture
Law
MedicalÂ
Interior designÂ
Technical adviceÂ
Other professions, including movie artists (producers, directors, actors, editors, choreographers, singers, lyricists, cameramen, screenwriters, dialogue writers, music directors, art directors, and costume designers), authorised representatives representing other persons in exchange for a fee (excluding those who work for the individual or practise accounting
Presumptive Taxation Limits According to Budget 2023
For FY 2023–24 (AY 2024–25), the Budget 2023 amended the presumptive taxes limitations under Secs. 44AD and 44ADA as follows:
Category | Previous limits | New limits |
Sec 44AD:Â Small businesses | Rs. 2 crore | Rs. 3 crore |
Sec 44ADA:Â Professionals like doctors, lawyers, engineers, etc. | Rs. 50 lakh | Rs. 75 lakh |
Exemptions under Section 44ADA
Those who adhere to Section 44ADA will be permitted to do the following:
All deductions under Section 30-38, including allowances and unabsorbed depreciation, are allowed to a qualified individual.Â
After deducting authorised depreciation, the write-down value, or WDV, of depreciable assets will be determined once more.
Calculation of Presumptive Income under Section 44ADA
According to Section 44ADA of the Income Tax Act, the following two requirements must be satisfied to select the Presumptive Taxation Scheme:
The gross receipts for the profession should not exceed Rs 50 lakh.
At least 50% of the gross receipts must be reported as income by the taxpayer in the ITR.
Consider the example of Mr A, a freelance architect earning total receipts of Rs 40 lakh and incurring annual expenses of Rs 10 lakh towards rent, conveyance, telephone, etc. Let us check his taxable income under both normal provisions and the presumptive scheme:
Under normal provisions
Net Profit = Gross receipts- Expenses= Rs 40 Lakh- Rs 10 Lakh= Rs 30 Lakh
Under Presumptive scheme
Net Profit = Gross receipts- 50% deemed expenses = Rs 40 Lakh- Rs 20 Lakh= Rs 20 Lakh
The net profit under the normal provisions is higher than the presumptive scheme, making it beneficial to choose the presumptive scheme of taxation under section 44ADA.
Benefits of Section 44ADA
The following section discusses the main advantages of presumed taxation for professionals:
Comparing the tax filing process to other ITR forms, it is comparatively simple and quick. It not only saves a tonne of time and effort, but it also greatly lowers the possibility of making any mistakes.Â
Typically, professionals don't have a significant quantity of expenses to report. Nevertheless, tax savings can be achieved by designating 50% of profits as profit and the remaining 50% as costs. Â
The easy-to-follow procedures and straightforward tax filing process encourage people to file their own income tax returns. As a result, people no longer need to look for the help of qualified tax advisers. Typically, tax experts charge between Rs. 5000 and Rs. 15000 for submitting taxpayers' income taxes.
Implications of Choosing Section 44ADA
It is assumed that all business cost deductions have been approved. The remaining 50% of profits after they are taxed at 50% of gross revenues is thought to be deductible for all of the assessee's business costs. Consumables, the price of services obtained from another professional, daily costs, books, stationery, phone bills, asset depreciation (laptop, automobile, printer, etc.), and any other expenses incurred to continue in the business can all be considered business expenses. For tax purposes, the write-down value (WDV) of an asset is determined based on the annual depreciation allowed. If the assessee sells the asset later, this WDV will constitute the asset's value for tax purposes.
One can choose to use or not use Section 44ADA of the Income Tax Act by considering all of these factors. They should also figure out how to maximise this tax provision and reduce their annual income from the front of the tax collection.
FAQ
Q1. What is 44ada in income tax?
The Income Tax Act's Section 44ADA offers a system for presumptive taxing profits and gains derived from professional activities.
Q2. Which kind of IT Return needs to be filed for the presumptive taxation plan?Â
Individual taxpayers must report such income as "Profit and Gains of Business or Profession" (PGBP) and make sure to file Form ITR-4 on the IRS web if they have chosen to be subject to presumptive taxation under Section 44ADA. Note that an individual must file an ITR-3Â if they have capital gains income in addition to presumed income.
Q3. What is the limit of 44ADA for FY 2023 24?
The threshold under Section 44ADA was raised from Rs 50 lakhs to Rs 75 lakhs in Budget 2023, provided that cash receipts remain below 5% of total revenue.
Q4. For whom is Section 44ADA applicable?Â
People who work in specific occupations and have a professional salary below Rs 50,00,000 are eligible to apply for this plan under Section 44ADA. Simplifying tax procedures for self-employed individuals can aid in mitigating their tax burden.
Q5. When should an assessee get a tax audit under Section 44ADA?
An assessee is required by section 44ABÂ to keep books and have accounts audited if they satisfy the following requirements:
The profession offers income at a rate that is less than 50% of gross receipts
The assessee's total income exceeds the basic exemption
Q6. a freelancer claim expenses like internet, rent, travelling, etc. under Section 44ADA?
In accordance with Section 44ADA, a freelancer who has selected the Presumptive Scheme is required to declare 50% of their gross income as income. It is feasible to report profit as a predetermined proportion of receipts without maintaining any accounting records. The freelancer is therefore unable to submit any additional expense claims. However, he or she is still eligible to deduct Chapter VI-A expenses for things like gifts, mediclaim premiums, and LIC subscriptions.
Q7. Do I have to pay advance tax if I choose the Presumptive Taxation Scheme under Section 44ADA?
Yes. If you owe more than INR 10,000 in taxes for the fiscal year, you have to pay advance tax. Instead of making four payments in normal circumstances, you must pay advance tax on or before March 15th if you have selected a presumptive taxation system under section 44AD or 44ADA. However, you will be required to pay interest under Sections 234B and 234C if you do not pay advance tax by the fiscal year's 15th of March.
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