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Section 44ADA – Presumptive Tax for Professionals

Section 44ADA provides a presumptive taxation scheme for professionals like doctors, engineers, lawyers, etc. According to this, they can pay a flat rate of 8% on 50% of their gross receipts without deductions as an alternative to normal tax computation.

As a professional, completing your income tax returns can feel overwhelming. It’s a lengthy and intricate procedure if you don’t know much about tax legislation and rules. Section 44ADA of the Income Tax Act makes filing tax returns easier for professionals.
 

In this blog, we will discuss Section 44ADA and its advantages for Indian professionals.

What is Section 44ADA of The Income Tax Act?

Section 44ADA of the Income Tax Act provides presumptive taxation for certain professionals. It allows eligible individuals to pay 50% of their gross income tax. Only those with a professional income under section 44ADA less than ₹50 lakhs and those engaged in specified occupations can opt for this scheme. It aims to simplify tax compliance for self-employed individuals while reducing their tax liability.

Objectives
 

The major objectives of Section 44ADA of the Income Tax Act are:
 

  • Simplification of the tax system for self-employed professionals. This section allows them to pay tax presumptively at a fixed percentage of gross receipts.
  •  Minimisation of the tax burden on self-employed individuals. Paying tax on 50% of gross receipts reduces the taxable income for many professionals.
  • Facilitation of streamlined business processes. Presumptive taxation relieves professionals from maintaining accounts books. Additionally, sec 44ADA of the Income Tax Act reduces the account audit under normal provisions.
  • Parity establishment among businesses under Section 44ADA of the Income Tax Act. The act also helps manage all eligible professionals in a standardised and simple manner.

Eligibility Criteria for Section 44ADA of the Income Tax Act

To be eligible for this scheme, you must:
 

  • Earn less than ₹50 lakhs a year from your profession.
  • Fill out Form ITR-4 to submit your income tax return.
  • Must be a professional in any of these fields:
     
  1. Legal
  2. Medical
  3. Engineering
  4. Architecture
  5. Accountancy
  6. Technical consultancy
  7. Interior decoration
  8. Movie industry professionals like producers, directors, actors, editors, music directors and others
  9. Authorised representatives (excludes employees and accountants)
  10. Any other profession notified by the Central Board of Direct Taxation (CBDC)

Budget 2023 Update

The government has revised the presumptive taxation limits under Section 44AD and Section 44ADA of the Income Tax Act for the financial year 2023-24 (the assessment year 2024-25) as follows:
 

Category

Previous limit

Revised limit

Sec 44AD: For small businesses

₹2 crores

₹3 crores

Sec 44ADA: For professionals like doctors, lawyers, engineers, etc.

₹50 lakhs

₹75 lakhs

Benefits of Section 44ADA of the Income Tax Act

Section 44ADA provides several important benefits to eligible professionals and freelancers in India. It allows for a simple and hassle-free tax filing process. With no need to maintain accounting books under Section 44AA, it saves time and effort for small businesses.
 

This section reduces the tax liability by deeming 50% of gross receipts as profit. It lowers the tax outgo for those with low net incomes. Furthermore, it encourages compliance by making the tax system less complex.
 

With a simplified mechanism, Section 44ADA facilitates the smooth running of self-employment activities. The uniform application of presumptive taxation also ensures parity among eligible professionals.
 

These benefits maximise cash flow and savings for sole proprietorships and small businesses. A lighter compliance burden frees up resources for business growth. Lastly, Section 44ADA also aids tax planning and management.

Calculation of 44AD Presumptive Income Under Section 44ADA

Mr X is an independent interior designer. For the financial year 2022-23, his collections are ₹40 lakhs. He spends an estimated amount of ₹10 lakhs annually on rent, transport, utility, and travelling.
 

Here, we can compare his taxable income under normal provisions and the presumptive scheme as below:
 

Under Normal Provision
 

Gross Receipts: ₹40,00,000

Less: Expenses ₹10,00,000

Net Profit: ₹30,00,000
 

Under Presumptive Scheme
 

Gross Receipts: ₹40,00,000

Less: 50% deemed as expenses, leaving ₹20,00,000

Net Profit: ₹20,00,000
 

But for example, the net profit under the presumptive payment method is lower than the normal provisions. Thus, it would benefit Mr. X to declare his income under the presumptive taxation scheme under section 44ADA.

Things to Remember Regarding Section 44ADA

Some important things to remember regarding Section 44ADA are as follows:
 

  • Only individuals and certain partnership firms are eligible, not limited liability partnerships. The professional must be in a specified field like engineering, medicine, law, etc.
  • Annual gross receipts from the profession should not exceed ₹75 lakhs to claim the presumptive taxation benefit.
  • If income is offered at less than 50% of gross receipts or total income exceeds the basic exemption limit, books of accounts need to be maintained.
  • Profits are deemed at 50% of gross receipts. No other expenses can be claimed as a deduction under this scheme.
  • Once opted, professionals can switch back to normal taxation in future years but not vice versa.
  • Partnership firms availing this benefit cannot claim a deduction for partners' remuneration.
  • Salaried individuals earning income from eligible professions can add only 50% of side business income to total taxable income.
  • Advance tax instalment dates apply even under presumptive taxation. Interest is levied for late payments.
  • Section 44ADA will permit the claim of all deductions mentioned in Sections 30-38, including unabsorbed depreciation and allowances.
  • After subtracting the allowed depreciation, the value of the assets would be calculated as written down value (WDV) again.

Conclusion

Therefore, Section 44ADA of the Income Tax Act provides a simple way to e-file your tax return. Opting for a presumptive tax system reduces the hassle of preparing their tax returns and availing certain tax benefits. However, one must remember that it’s an optional scheme. You can opt for the normal tax filing process, too.

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Tata AIA Life Insurance

A joint venture between Tata Sons Pvt. Ltd. and AIA Group Ltd. (AIA),  Tata AIA Life Insurance  is one of the leading life insurance providers in India. We post everything you need to know about life insurance, tax savings and a variety of lateral topics such as savings and investments in this space. You can access and read a host of different blogs, articles and pages at the Tata AIA Life Insurance Knowledge Center or get in touch with us with any queries or questions!

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Frequently Asked Questions

Is a balance sheet required for Section 44ADA?

No, a balance sheet is not required if a professional opts for taxation under section 44ADA.

Are there any limitations for the presumptive taxation regime under section 44ADA?

No, section 44ADA does not impose any limitations on professionals.

As per the presumptive taxation scheme introduced under section 44ADA, do I have to pay advance tax?

Yes, you need to pay advance tax when you expect your income tax to exceed ₹10,000 during the financial year.

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  • Insurance cover is available under the product.
  • The products are underwritten by Tata AIA Life Insurance Company Ltd.
  • The plans are not a guaranteed1 issuance plan, and it will be subject to Company’s underwriting and acceptance.
  • For more details on risk factors, terms and conditions please read sales brochure carefully before concluding a sale.
  • This blog is for information and illustrative purposes only and does not purport to any financial or investment services and do not offer or form part of any offer or recommendation. The information is not and should not be regarded as investment advice or as a recommendation regarding any particular security or course of action.
  • Please know the associated risks and the applicable charges, from your Insurance agent or the Intermediary or policy document issued by the insurance company.
  • Every effort is made to ensure that all information contained in this blog is accurate at the date of publication, however, the Tata AIA Life shall not have any liability for any damages of any kind (including but not limited to errors and omissions) whatsoever relating to this material.