Section 44ADA – Presumptive Tax for Professionals

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:
 

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.