Section 44ADA of the Income Tax Act provides a unique Presumptive Taxation Scheme (PTS) tailored for professionals. This scheme simplifies tax calculations and compliance for eligible professionals, ensuring ease of doing business. In this article, we’ll delve into the details of Section 44ADA, including eligibility criteria, deductions, and its implications for different professionals.
1. Section 44ADA of the Income Tax Act governs the provision of a presumptive taxation scheme (PTS) for specified professionals.
2. Eligibility for Section 44ADA: As per section 44ADA (1), an individual or partnership firm (excluding LLP) who is engaged in a profession referred to in sub-section (1) of section 44AA is eligible for a presumptive taxation scheme.
2.1 Profession referred to Section 44AA (1): – Every person carrying on legal, medical, engineering, or architectural profession or the profession of accountancy or technical consultancy or interior decoration or any other profession as is notified by the Board in the Official Gazette are eligible for the presumptive taxation scheme for professionals under section 44ADA. – Section 44AA (1)
2.2 However, this doesn’t mean that people from other professions like contractual IT professionals, tuition teachers (academic, dance, or drawing), or those providing professional services from home cannot opt for a presumptive taxation scheme. They can surely opt for PTS but as a business and not as a profession.
2.3 The definition of the term ‘Business’ as defined in the Income Tax Act is an inclusive definition and includes any trade, commerce, or manufacture and is wide enough to include activities involving time attention, and labor for earning income, such activities can also be considered to come within the ambit of the term ‘Business’
2.4 Therefore, “considering the same, the resident taxpayers engaged in professions other than as specified profession i.e., IT professionals rendering routine services other than technical consultancy, providing tuitions (academic, dance or drawing) can consider opting for the PTS under Section 44AD subject to the threshold limit as prescribed under the Act.
3. Eligibility to opt PTS for Profession & Business as well:
3.1 A medical professional can discharge his duties as a professional doctor as well as carry on trading in medicine. He can avail the benefit of section 44ADA for professional income and of section 44AD for trading income.
3.2 A Chartered Accountant (specified professional under 44AA (1)) who is a partner in a CA firm and also provides consultancy services in his professional capacity would be eligible to opt for a presumptive scheme under section 44ADA as his receipt is a professional receipt for this section.
3.3 Freelancers, in any of the specified or non-specified professions, get covered under the same rules as applicable to any other full-time specified or non-specified professional. For example, a salaried individual with a regular job chooses to freelance to generate extra income. In such circumstances, the salary income is added to the earnings generated from freelancing activities to ascertain the gross income accrued in a financial year. It must be noted that the total annual income will be liable for taxation as per their applicable tax slab rate.
3.4 Illustration: Mr. Arindam’s salary income is Rs.25 lakh per annum and his freelance income from technical consultancy (specified profession) is Rs.20 lakh. He can opt for the presumptive taxation scheme under section 44ADA. In this case, only half the freelance earnings will be added to total income and annual income will stand at Rs.35 lakh. Mr. Arindam must file ITR-4.
4. Gross Receipts do not exceed Rs 50 Lakhs: The presumptive taxation scheme of section 44ADA can be opted by the eligible persons if the total gross receipts from the profession do not exceed Rs. 50 Lakhs. (Rs.75 Lakhs with the specified condition that cash receipt therein does not exceed 5% of total receipts as amended vide Finance Act 2023 & applicable w.e.f. AY 2024-25)
5. Taxable Professional Receipts: Under this scheme, a sum equal to 50% of the gross receipts is deemed to be the taxable professional receipts under the head “profits and gains from the business”. If the assessee has claimed to have earned a higher sum than 50%, then that higher sum is taxable
5.1 Calculation of Taxable Professional Receipt
|Sl.||Particulars||Mr. Anupam||Mr. Bimal||Mr. Chirag|
|(c)||Actual Professional receipts (a)-(b)||6,00,000||18,00,000||26,00,000|
|(d)||Deemed profit [50% of (a)]||5,00,000||20,00,000||25,00,000|
|(e)||Taxable professional receipt under section 44ADA (higher than (c) or (d)||6,00,000||20,00,000||26,00,000|
Note: Professional expenses may include rent, electricity bill, consumables, cost of services taken from another professional, daily expenses, books, stationery, telephone charges, depreciation on assets (laptop, vehicle, printer, etc.), and any other expense incurred to carry on the profession. It will not include personal expenses like household expenses, investments, gifts, repayment of housing loans, etc.
5.2 If the assessee has claimed to have earned a higher sum than 50%, then that higher sum is taxable. In the Illustration above, Mr. Chirag earned Rs 26,00,000 which is higher than 50% of gross receipt of 50,00,000. The taxable amount will be Rs 26 Lakhs and not 50% of gross receipt, even if he opts for the presumptive scheme under section 44ADA.
6. An assessee under presumptive taxation scheme is not required to maintain books of accounts. It has been held in various case laws that AO cannot ask for books of accounts for a person declaring income as per the Presumptive taxation scheme. However, the AO can analyze the situation (based on the information available on AIS) and ask to provide further details if the return is selected for scrutiny.
6.1 It is the responsibility of the taxpayer to prove that the income addition is not justified.
6.2 It is advisable to prepare a rough calculation sheet and pay tax on actual receipts if it is more than 50% of gross receipts.
7. Deductions from Gross receipts: An assessee opted for Presumptive Scheme under Section 44ADA cannot claim any further business expenditures from taxable receipt
7.1 The assessee can claim deduction under chapter VI-A, which includes deduction under sections 80C to 80 U of the Act.
7.2 There is no provision for the assessee under Presumptive Taxation Scheme to carry forward losses to subsequent assessment years.
7.3 Professionals who had previously chosen this tax provision can opt out of it at any time. Unlike section 44AD (4), there is no restriction for opting out in subsequent 5 years.
8. Advance Tax can be paid in one go before March 15th, 2023 instead of paying it in installments
9. Other relevant provisions:
9.1 An assesse who adopts the presumptive taxation scheme is deemed to have claimed all deduction of expenses. Any further claim of deduction is not allowed after declaring profit @ 50%.
9.2 While computing income as per the provisions of section 44ADA, separate deduction on account of depreciation is not available. However, the written down value of any asset used in such business shall be calculated as if depreciation as per section 32 is claimed and has been actually allowed
10. Keeping all the aspects in mind, one can decide whether to opt for Section 44ADA of the Income Tax Act or not.
Conclusion: Section 44ADA of the Income Tax Act is a valuable tool for professionals looking to simplify their tax obligations. It offers a straightforward way to calculate taxable income without the need for extensive bookkeeping. However, professionals must carefully evaluate their eligibility and consider the implications, especially if they have multiple income sources or different types of income.
Disclaimer: The information provided in this article is for educational purposes only and should not be considered as financial or legal advice.
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