All about Revised Presumptive Taxation Scheme under Section 44ADA

India’s income tax regime has long sought ways to simplify tax compliance for small professionals and businesses. One such initiative is the presumptive taxation scheme, which allows eligible taxpayers to calculate their income on a presumptive basis, thereby minimizing the burden of maintaining detailed books of accounts.

Section 44ADA, introduced in the Finance Act of 2016, was a major step in this direction. It provided relief to small professionals by offering a simplified method of computing taxable income. However, with the changing economic landscape and government policies, Budget 2023 introduced revised provisions under Section 44ADA, which became effective from Assessment Year (AY) 2024-25.

This article delves into the details of the revised presumptive taxation scheme under Section 44ADA, its eligibility, computation method, benefits, limitations, and impact on taxpayers.

1. What is Section 44ADA?

Section 44ADA of the Income Tax Act, 1961, provides a simplified scheme of taxation for professionals. It allows eligible professionals to declare a certain percentage of their gross receipts as income, and pay tax accordingly, without the need to maintain detailed books of account or get them audited.

2. Objective of the Scheme

The primary objective of Section 44ADA is:

• To reduce the compliance burden for small professionals.
• To promote ease of doing business in the service sector.
• To encourage more professionals to come within the tax net by offering a hassle-free method of taxation.

3. Applicability and Eligible Assessees

Section 44ADA applies to the following:

• Resident individuals, Hindu Undivided Families (HUFs), and partnership firms (excluding LLPs).
• Assessee should be engaged in a profession referred to in Section 44AA(1) of the Act.

These professions include:

• Legal
• Medical
• Engineering
• Architectural
• Accountancy
• Technical consultancy
• Interior decoration
• Other notified professions (such as film artists, company secretaries, and information technology professionals)

4. Presumptive Income Rate

Under Section 44ADA:

• 50% of the gross receipts or turnover is deemed as income.
• The deemed income is taxed under the head “Profits and gains of business or profession”.
• No further deductions for expenses are allowed under Sections 30 to 38 (e.g., rent, depreciation, etc.).
• However, the assessee is allowed to claim deductions under Chapter VI-A (e.g., Section 80C, 80D) and rebate under Section 87A (if eligible).

5. Key Changes in the Revised Section 44ADA (Applicable from AY 2024-25)

With effect from 1st April 2023 (AY 2024-25), the Finance Act 2023 revised the applicability limits under presumptive schemes including Section 44ADA. Here’s what’s new:

a. Enhanced Threshold Limit

• The threshold limit of gross receipts to avail the presumptive scheme under Section 44ADA has been enhanced from ₹50 lakhs to ₹75 lakhs.

b. Digital Transactions Condition

• The enhanced limit of ₹75 lakhs is available only if at least 95% of the receipts are through non-cash means, i.e., via:
  • Cheques or demand drafts
  • Electronic clearing systems through a bank
  • Net banking, credit/debit cards, UPI, etc.

If cash receipts exceed 5% of the total receipts, the old limit of ₹50 lakhs continues to apply.

6. Illustrative Example

Let’s understand with an example.

Case 1: Under ₹50 lakhs gross receipts

• Gross Receipts: ₹48 lakhs
• Presumptive income (50%): ₹24 lakhs
• Taxable income = ₹24 lakhs
• No requirement to maintain books or audit.

Case 2: Between ₹50 lakhs and ₹75 lakhs (with 95% non-cash receipts)

• Gross Receipts: ₹70 lakhs
• 96% through digital payments
• Eligible for Section 44ADA
• Presumptive income: ₹35 lakhs (50%)
• No books or audit required.

Case 3: Gross receipts of ₹70 lakhs with more than 5% cash receipts

• Only ₹60 lakhs through digital mode (i.e., ~85.7%)
• Ineligible for Section 44ADA
• Must maintain books of accounts and get them audited if income exceeds basic exemption limit and profit declared is less than 50%.

7. Benefits of the Revised Section 44ADA

a. Simplified Compliance

• No need to maintain detailed books of accounts.
• No requirement of tax audit under Section 44AB.

b. Ease for Digital-Friendly Professionals

• Encourages non-cash transactions.
• Professionals using digital modes get the benefit of a higher threshold.

c. Saves Time and Cost

• No accounting or audit-related compliance.
• Saves professional fees and effort.

8. Conditions and Limitations

While Section 44ADA offers a simplified scheme, there are a few important conditions and limitations:

a. Lower Income Declaration

• If the assessee declares income lower than 50% and such income exceeds the basic exemption limit, then:
  • He/she must maintain books of accounts as per Section 44AA.
  • A tax audit under Section 44AB becomes applicable.

b. Applicability Restricted to Certain Professionals

• Only specified professions under Section 44AA(1) are covered.
• Business income is not covered under this section (businesses can use Section 44AD instead).

c. No Separate Deduction of Expenses

• The presumptive income of 50% is considered as final.
• No further business expenses (like rent, conveyance, depreciation, etc.) can be deducted.

9. Books of Accounts and Audit – When Required?

10. Comparison with Other Presumptive Schemes

11. Filing of Income Tax Return (ITR)

Professionals opting for presumptive taxation under Section 44ADA need to file:

• ITR-4 (Sugam Form) – provided they meet the eligibility and don’t have income from speculative business, capital gains, or foreign assets.

12. Important Judicial Precedents and Clarifications

• CBDT Circular No. 8/2016 clarified that professionals opting for presumptive taxation cannot claim further deductions from the 50% income.
• Several court rulings have upheld the view that once presumptive income is offered, no separate disallowance for non-maintenance of books or audit can be made.

13. Practical Considerations for Professionals

• Digital Mode of Receipt: Ensure at least 95% of receipts are through digital mode if your turnover exceeds ₹50 lakhs but is less than ₹75 lakhs.
• Audit Avoidance: If profits are genuinely lower than 50% due to higher expenses, then audit and books become mandatory. Maintain proper justification.
• Professional Advice: Consult a CA if you’re on the threshold or have mixed sources of income.

14. Conclusion

The revised Section 44ADA is a welcome step in India’s journey towards digital compliance and ease of doing business for small professionals. The enhanced limit of ₹75 lakhs offers much-needed flexibility and relief for high-earning professionals who primarily deal in digital transactions.

However, professionals must carefully assess their eligibility and consider the trade-off between convenience and actual tax liability. While the scheme offers simplicity, it might not suit everyone, especially those with high legitimate expenses. Strategic tax planning and proper advice are crucial for optimal benefit under this scheme.

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About the Author: The author is Ruchika Bhagat, FCA helping foreign companies in setting up and closing businesses in India and complying with various tax laws applicable to foreign companies while establishing a business in India. Neeraj Bhagat & Co. Chartered Accountants is a well-established Chartered Accountancy firm founded in the year 1997 with its head office in New Delhi.