Opting for Presumptive Taxation under Section 44ADA: Who is Eligible?

Presumptive Taxation Scheme Under Section 44ADA

Presumptive taxation is the system of taxation where the government assumes a certain percentage of your earnings or gross receipts as taxable income without taking the expenses incurred into consideration. Section 44ADA of the Income Tax Act,1961 provides a simple taxation method for small professionals. It offers a special provision for the taxation of profits and gains earned from professions mentioned under the Income Tax Act’s section 44AA(1).

In the past, the presumptive taxation scheme was only available to small businesses. However, this scheme decreases the compliance burden on small professions, and thus, facilitates ease of doing business. Under the scheme, taxable income will be computed on a presumptive basis, which is at 50% of the gross receipts.

Earlier, the benefits of section 44ADA were enjoyed by these specific professionals whose annual gross receipts were under Rs.50 lakhs. However, the government updated presumptive taxation limits under section 44ADA for FY 2023-24 (AY 2024-25) to Rs.75 lakhs. The presumptive taxation limits for FY 2024-25 (AY 2025-26) remain the same, provided 95% of your gross receipts are conducted through recognised banking channels. This includes modes such as account payee cheque, electronic clearing system, demand draft etc.

People who practice the following professions qualify for the presumptive taxation scheme under section 44ADA:

• Accountants
  
• Interior decorators
  
• Technical consultants
  
• Engineers
  
• Legal services
  
• Medical services
  
• Architecture
  
• Other professionals, which include:
  

• Movie artists- producers, directors, actors, editors, cameramen, music directors, dance directors, art directors, singers, costume designers, lyricists, story writers, and screenplay or dialogue writers.
  
• An authorized representative is an individual who, for a fee, represents another person before a tribunal or legal authority. This excludes employees of the represented person and individuals engaged in the profession of accountancy.
  
• Any other professions notified by the Central Board of Direct Taxes (CBDT).
  

Benefits of The Presumptive Taxation Scheme Under Section 44ADA

The top benefits of this scheme include:

• Easy filing process

  
  

  In comparison to other ITR forms, the tax filing process under this scheme is hassle-free. It is a short and straightforward format, that saves time and reduces the chance of making any mistake.

  
  

• Reduction in tax liability

  
  

  Under normal circumstances, professionals are not left with a significant quantity of work-related expenses to declare. However, by declaring 50% of earnings as profit and the balance as expenses, you can save on taxes successfully.

  
  

Maintaining Books of Account

In case you meet the following criteria, you are required to maintain books of account and get them audited under section 44AB of the Income Tax Act.

• Your gross receipts exceed Rs.50 lakhs. This limit is revised to Rs.75 lakhs, provided the total amount received in cash is no more than 5% of the total receipts.
  
• The income from the profession is less than 50% of the total receipts, but the total income exceeds the basic exemption limit. Simply, your expenses to be claimed are over 50% of gross receipts.
  

Implications of Opting for Section 44ADA

(H2)

Under Section 44ADA, taxpayers are deemed to have claimed all business expense deductions. Once profits are taxed at 50% of gross receipts, the remaining 50% is considered to cover all business expenses, such as consumables, professional service costs, office expenses, books, stationery, communication costs, and depreciation on assets like laptops, vehicles, and printers. For tax purposes, the written down value (WDV) of assets will be calculated as if depreciation has been claimed annually. If the asset is later sold, its WDV will determine its tax value.

Considering all these aspects, you can decide whether to opt for this tax provision or not. In case you are choosing Section 44ADA of the Income Tax Act, remember to find ways to make the most of it and save money on taxes.

FAQs

1. Can 44AD and 44ADA be claimed together?

   
   

   Yes, you are allowed to use Section 44AD and 44ADA simultaneously, provided you generate income from both business and profession.

   
   

2. Who is eligible to take advantage of the presumptive taxation scheme of section 44AD?

   
   

   The presumptive taxation scheme of section 44AD can be adopted by following persons :

   1) Resident Individual

   2) Resident Hindu Undivided Family [HUFs]

   3) Resident Partnership Firm (not Limited Liability Partnership Firm)

   In other words, the scheme cannot be adopted by a non-resident and by any person other than an individual, a HUF or a partnership firm (not Limited Liability Partnership Firm).

   Further, this Scheme cannot be adopted by a person who has made any claim towards deductions under section 10A/10AA/10B/10BA or under sections 80HH to80RRB in the relevant year.

   
   

3. What provision will apply if a person opts for the presumptive taxation scheme of section 44ADA and declares his income from the profession at a lower rate (i.e. less than 50%)?

   
   

   You can declare your income at a lower rate, i.e. less than 50%. However, if you fall under this category and your gross income exceeds the basic exemption limit, you are required to maintain books of account under Section 44AA and have your accounts audited under Section 44AB of the Income Tax Act.