Presumptive Taxation Scheme for Professionals: Benefits & Misconceptions

Introduction: To give relief to small taxpayers from the tedious job of maintaining of books of account and getting the accounts audited, the Income-tax Act has framed the presumptive taxation scheme under section 44ADA (the scheme). Medical professionals with professional receipts of Rs. 50 lakhs or less are eligible to claim benefit of the scheme. The limit of Rs. 50lakhs is enhanced to Rs. 75 lakhs from financial year 2023-24. The increase in limit is subject to a condition that 95% of the gross receipts must be through banking channels.

Benefits:

By opting for the scheme, the professional gets the following benefits:

• No need of maintaining books required under Section 44AA
• No requirement of having accounts audited under Section 44AB

How it works:

Income of the professional opting for the scheme will be computed on presumptive basis, i.e. @ 50% of the total gross receipts of the profession.

For example: Dr. A, has gross receipts of Rs. 40 lakhs is entitled to claim benefit of the scheme and compute his taxable income as Rs. 20 Lakhs. Here it is assumed that Dr. A has incurred expenses to the extent of Rs. 20 lakhs and only the balance Rs. 20 lakhs is his income.

General misconceptions about the scheme and a word of caution:

The general understanding is that a person opting for 44ADAscheme can offer income at 50% of gross receipts under all circumstances. However, 44ADA stipulates that if a person has got income higher than 50% of gross receipts he shall offer such higher income. The net income is determined under two methods as under:

1. Direct method:

In the aforesaid example if Dr. A has incurred expenses of only Rs. 5 Lakhs in connection with the profession and the balance Rs. 35 Lakhs is utilised for investment in asset and personal drawings, Dr. A has to offer net income of Rs. 35 Lakhs from gross receipts of Rs. 40 Lakhs.

1. Indirect method or Net Assets Method:

For example, the assets and liabilities as on 31.03.2022 and 31.03.2023 are as under:

Dr. B has also incurred aggregate of Rs. 5 Lakhs towards his personal expenses. Gross receipts of Dr. B for financial year 2022-23 is Rs. 45 lakhs. Dr. B is not maintaining any records for his professional expenditure. Income of Mr. B is computed as under:

In the aforesaid example higher income of Rs. 40 lakhs earned by Dr. B has to be offered as income and not Rs. 22.50 lakhs(50% of Rs. 45 Lakhs).

If Dr. A & Dr. B fail to offer higher income and continue to declare 50% of gross receipts as their income, Income Tax Department could assess the differential amounts as unexplained money/investment/expenditure which attract tax rate of 78% and 10% of tax as penalty.

Conclusion: Though the presumptive scheme allows offering income under blanket rate, one has to compute his actual income considering the investments and offer higher income if earned. Conversely, if anybody claims to have earned income lower than 50% of gross receipts then such person has to maintain regular books of accounts and get them audited to offer such lower income.