For extending the benefits of presumptive taxation to specified professionals, Section 44ADA was inserted into the Income Tax Act. Earlier, this scheme was only applicable to small business owners. This tax scheme reduces the burden of compliance for the small professions and reinforces the ease of doing business. Under this scheme of taxation, the profit for the professionals is presumed at 50 percent of their gross receipts. However, only specified professionals prescribed under Section 44AA with total gross receipts not exceeding INR lakh per annum can opt for presumptive taxation scheme under Section 44ADA.

Professionals eligible for Presumptive Taxation under Section 44ADA

Individuals engaged in the professions listed below can opt for presumptive taxation under Section 44ADA:

  • Interior decorations,
  • Technical consulting,
  • Engineering,
  • Accounting,
  • Legal,
  • Medical,
  • Architecture,
  • Other professionals, as prescribed by the CBDT

Who is eligible to claim Presumptive Taxation Scheme under Section 44ADA? 

The below mentioned assessees are eligible to claim Presumptive Taxation Scheme under Section 44ADA:

  • Individuals
  • HUFs (Hindu Undivided Families)
  • Partnership Firms not including LLPs

What is the basis of presumptive income under Section 44ADA? 

The higher of the below two measures are considered as presumptive income in the hands of the professional:

  • 50 percent of the gross receipts from the profession
  • Income declared by the professional from his profession

Example – Mr. Rajeev is an interior decorator with gross receipts of INR 40 lakh for the financial year 2019-20. His overall expenses for the entire financial year towards rent, electricity, telephone, traveling, etc. is INR 15 lacs. We can compare Mr. Rajeev’s taxable income under both the normal income tax provisions as well as the presumptive scheme.

Income Chargeable to Tax under Normal Income Tax Provisions

Gross Receipts INR 40,00,000
Less: Expenses INR 15,00,000
Income Chargeable to tax INR 25,00,000

Income Chargeable to Tax under Presumptive Taxation Scheme under Section 44ADA

Gross Receipts INR 40,00,000
Less: 50 percent as deemed expenses INR 20,00,000
Income Chargeable to tax INR 20,00,000

It’s quite apparent from the above example, the income chargeable to tax under the presumptive scheme is much lower than under the normal income tax provisions. Hence, it would be beneficial for Mr. Rajeev to opt for presumptive scheme under Section 44ADA.

What are the benefits of Presumptive Taxation Scheme for a professional? 

There are few key benefits of presumptive taxation for a professional which are listed below:

  • Reduces tax liability: A professional can declare 50 percent of his income as profit and the remainder as an expense for saving tax as he would have relatively fewer expenses to declare.
  • Ease of tax filing: One of the benefits of presumptive tax scheme under Section 44ADA is that the income tax return form is concise and simpler than the complicated other income tax return forms for filing income taxes under other sections of the Act.
  • Economical: Income tax consultants can charge you exorbitantly for filing tax returns due to complicated filing requirements which are involved therein. Conversely, under Section 44ADA, professionals could file their returns on their own due to its simplistic nature and concise format which could save professionals a lot of money.

When you need to maintain books of accounts and get them audited even under presumptive taxation under Section 44ADA?

In case a professional meet the below mentioned criteria, then the professional needs to maintain books of accounts and get them audited as well:

  • Profits from the profession are declared at a rate lower than 50 percent of the gross receipts
  • The total income of the profession is more than the basic exemption which is chargeable to tax

Budget 2021 Update related to Section 44ADA

Earlier, Section 44ADA was available to all the residents assessees in India. However, post Budget 2021, it’s applicable only to the resident individuals, HUFs and a partnership firm, and has clearly excluded Limited Liability Partnerships from its scope of eligibility.

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  1. vivek says:

    It’s confusing. First you said it is beneficial to report ₹20L inc instead of Rs 25L and save tax, then you also mentioned maintain books if inc>₹2.5L and declare income but not less than 50% of Gr, obviously, ₹25L need to be declared in given example?!

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