Section 44ADA: What is the Presumptive Tax Scheme for Professionals?
Updated: Oct 29
Managing tax compliance can often be a complex and time-consuming task for professionals, especially those running small to medium-scale practices. To simplify tax filing and reduce the burden of maintaining detailed books of accounts, the government introduced Section 44ADA under the Income Tax Act, which offers a presumptive taxation scheme for eligible professionals. This scheme allows professionals to declare a fixed percentage of their gross receipts as income, thereby easing the process of tax calculation.
Under Section 44ADA, professionals such as doctors, lawyers, architects, engineers, and freelancers, with gross receipts of up to Rs. 75 lakhs, can opt for this scheme. By declaring 50% of their gross receipts as taxable income, professionals can enjoy simplified tax compliance while focusing more on their practice and less on administrative burdens. In this blog, we will delve into the eligibility, benefits, and key provisions of Section 44ADA, highlighting how it can be an advantageous option for professionals seeking efficient tax management.
Table of Content
What is Section 44ADA of the Income Tax Act?
Section 44ADA incorporates a special provision for the computation of income and gains of small professions. In brief, section 44ADA was brought into the statute book to include certain specialized professionals in the ambit of the presumptive taxation regime, hitherto reserved for small businesses. It simplifies the compliance chain for doing business and related regulatory burden upon small professions by presumptive tax regime through assuming profits at 50% of gross receipts.
What is Presumptive Income?
Presumptive income refers to the simplified method of calculating taxable income for certain types of businesses and professionals. Instead to determine the actual income based on the income and expenses record. The tax authorities assume a certain percentage of turnover as taxable income.
This method is created to decrease administrative burdens on small businesses and professionals. It also aims to prevent tax evasion by providing a straightforward and predictable way to calculate tax liability.
Salient Features of Section 44ADA
Simplified taxation: Section 44ADA of the IT Act provides that in the case of certain professionals, 50% of gross annual receipts shall be deemed to be their taxable income. This obviates the need for extensive books of accounts and related compliance.
Eligibility Criteria: This scheme shall be available to every professional whose gross receipts do not exceed Rs. 50 lakhs in a financial year. Professionals include not only doctors, lawyers, architects, and other specified professionals but also extend to integration with similar professions.
No Accounting Records to be Maintained: There is no requirement to maintain detailed accounting records only for the taxpayers. They will have to maintain records and audit if their income is more than the exemption limit or less than 50 percent of the receipt.
Global income is Taxable: It means professionals pay taxes for the earnings received from clients based abroad, making sure that every bit of income is accounted for and declared for taxation.
Objectives of Section 44ADA
Section 44ADA has helped to simplify the tax system for self-employed professionals.
Section 44ADA has allowed a reduction of the tax burden for self-employed individuals.
It helps to facilitate the smooth flow of conducting businesses.
The section has helped to establish parity among the businesses.
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)
Professionals working in the following fields are qualified:
Accounting
Engineering
Architecture
Law
Medical
Interior design
Technical advice
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: Small businesses | Rs. 2 crore | Rs. 3 crore |
Sec 44ADA: 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.
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.
Examples of Presumptive Scheme for Professionals under Section 44ADA
Example 1: Mr. Raj is a freelance graphic designer. His total receipts for FY 2023-24 are Rs. 35 lakhs, and his annual business expenses, including office rent, travel, and utilities, total Rs. 12 lakhs.
Particulars | Under Normal Provisions | Under Presumptive Basis |
Gross Receipts | Rs. 35 lakhs | Rs. 35 lakhs |
Less: Expenses Allowed | (Rs. 12 lakhs) | (Rs. 17.5 lakhs) |
Net Profit / Taxable Income | Rs. 23 lakhs | Rs. 17.5 lakhs |
In this case, Mr. Raj can opt for presumptive taxation under Section 44ADA, as the taxable income is 50% of gross receipts, which offers him a simpler tax solution.
Example 2: Dr. Meera is a medical practitioner with total gross receipts of Rs. 60 lakhs, of which cash receipts amount to Rs. 2,80,000. Her total expenses for the year are Rs. 11 lakhs.
Particulars | Amount |
Total Gross Receipts | Rs. 60,00,000 |
Cash Receipts (within 5% of total) | Rs. 2,80,000 |
Income Chargeable under Presumptive Scheme (50%) | Rs. 30,00,000 |
Since Dr. Meera's total gross receipts are below the revised limit of Rs. 75 lakhs, and her cash receipts are less than 5% of the total, she qualifies for presumptive taxation under Section 44ADA, where 50% of the gross receipts are considered her taxable income.
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.
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.
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.
Difference between Sections 44AD and 44ADA
Feature | Section 44AD | Section 44ADA |
Who Can Use It | Small businesses, like shop owners, contractors, freelancers, and partnership firms (but not LLPs), with turnover up to Rs 2 crore or Rs 3 crore if 95% or more transactions are digital. | Certain professionals, like doctors, lawyers, architects, and accountants, with annual receipts up to Rs 50 lakh or Rs 75 lakh if 95% or more transactions are digital. |
How Income is Calculated | Income is presumed to be 8% of turnover if payments are cash-based; if mostly digital, then 6% of turnover. | Income is presumed to be 50% of gross receipts, simplifying tax for professionals who might not want to detail every expense. |
Deductions | No extra deductions allowed except, in the case of partnerships, for partners’ salaries and interest. | No additional deductions on this income; 50% is presumed as taxable income, and that’s it! |
Opting In and Out | You can opt in and out, but if you leave 44AD after choosing it, you’ll have to wait 5 years before opting back in. | Section 44ADA offers more flexibility, allowing you to choose it year by year without restrictions. |
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?
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-3 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?
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 44AB 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?
By 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 financial 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 financial year's 15th of March.
Q8: Can a professional opt out of the presumptive taxation scheme under Section 44ADA after opting in once?
Yes, a professional can opt out of the presumptive taxation scheme after opting in, but they must note that if they opt out, they cannot opt back into the scheme for the next five years. This rule ensures consistency in tax compliance once the presumptive scheme is chosen.
Q9: What happens if my gross receipts exceed Rs. 75 lakhs in a financial year?
If your gross receipts exceed Rs. 75 lakhs in a financial year, you are not eligible to opt for the presumptive taxation scheme under Section 44ADA. In this case, you will need to maintain proper books of accounts and file your returns under normal tax provisions, reporting actual income and expenses.
Q10: Can professionals with income other than business or profession opt for Section 44ADA?
Yes, professionals with income other than business or profession, such as salary or rental income, can still opt for Section 44ADA for their professional income. However, such individuals may need to file ITR-3 instead of ITR-4, depending on the types of income they report.
Q11: Is GST applicable to professionals opting for Section 44ADA?
Yes, GST applies to professionals opting for Section 44ADA if their turnover exceeds the GST registration threshold, which is Rs. 20 lakhs for services. The presumptive scheme under Section 44ADA does not exempt professionals from GST compliance.
Q12: Can a professional pay self-assessment tax under Section 44ADA?
Yes, professionals opting for the presumptive taxation scheme under Section 44ADA can pay self-assessment tax if they owe any additional taxes after considering advance tax payments and tax deductions at source (TDS). This tax should be paid before filing the Income Tax Return.
Q13: What happens if my actual profit is less than 50% of my gross receipts?
If your actual profit is less than 50% of gross receipts and you wish to declare a lower income, you cannot opt for Section 44ADA. Instead, you will be required to maintain books of accounts, have them audited, and file your return under normal provisions.
Q14: Are non-resident professionals eligible to opt for Section 44ADA?
No, Section 44ADA is only applicable to resident individuals, Hindu Undivided Families (HUFs), and partnership firms (excluding LLPs). Non-resident professionals cannot opt for this presumptive taxation scheme.
Q15: What is the penalty for not filing a tax return under Section 44ADA?
If a professional fails to file their tax return under Section 44ADA by the due date, they may be subject to a late filing fee under Section 234F. Additionally, they could face penalties for non-compliance if their total income exceeds the basic exemption limit and they have not filed a return.
Q16: Can deductions under Chapter VI-A still be claimed under Section 44ADA?
Yes, even though the taxable income is assumed to be 50% of gross receipts under Section 44ADA, professionals can still claim deductions under Chapter VI-A, such as deductions for life insurance premiums, contributions to provident funds, and health insurance premiums.
Q17. What is the 44ada limit for ay 2024-25?
Individuals, HUFs and partnership firms engaged in any business with a total turnover that exceeds INR 2 crore in the previous financial year are eligible for section 44AD.
Q18. What is the tax audit limit for professionals ay 2024-25?
If you are involved in more than 1 business, you are liable to audit the accounts if the total turnover of your businesses is more than INR 1 crore. Similarly, if you operate more than 1 profession, you need to audit account books in case of gross receipts of all professionals that exceed INR 50 lakh.
Q19. Which ITR form is applicable for 44ADA?
Taxpayers can file the return in ITR form 4 for those who have chosen presumptive income taxation.
Q20. Can the 80C deduction be claimed under section 44ADA?
Despite choosing a presumptive scheme under section 44ADA, taxpayers can claim section 80 to save the tax deduction and investments.
Q21. What is professional income under section 44ADA?
Professional income under section 44ADA means income earned by individuals, HUFs, and partnership firms in professions such as legal, medical, and accountancy where 50% of the gross receipts are taxable income under the presumptive taxation scheme.
Q22. Who cannot opt for Section 44ADA?
The professionals who claim their income to be less than 50% of gross total receipts. And if the limit exceeds the gross receipt limit then they cannot opt for the section 44ADA or presumptive income.
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