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Section 44ADA: What is the Presumptive Tax Scheme for Professionals?

Updated: 2 days ago


Section 44ADA- What is the Presumptive Tax Scheme for Professionals

Many people have a misconception that freelance income is not liable to tax. Likewise, most people are not aware of the fact that for professionals, consultants, and freelancers, income tax is payable on 50% of the gross annual income. Professionals have already been provided a special presumptive taxation scheme under Section 44ADA of the Income Tax Act. This makes the scheme very easy with regard to taxation calculation and compliance. We will discuss in this article the details pertaining to Section 44ADA, eligibility criteria, exclusions, and the impact on various professions.

 

Table of Content

 

What is Section 44ADA of the Income Tax Act?

Section 44ADA incorporates a special provision for computation of income and gains of small professions. In brief, section 44ADA was brought on the statute book to include certain specialized professionals in the ambit of 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.


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 INR 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 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.


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.


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.


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?

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 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.







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