Important Keyword: Business and Profession Income, Presumptive Taxation Scheme.
Table of Contents
The presumptive taxation scheme for professionals is a beneficial provision aimed at providing relief to small taxpayers from the complexities of maintaining extensive books of accounts. This scheme operates under Section 44ADA of the Income Tax Act, offering professionals the option to declare their income at a prescribed rate, thereby simplifying their tax obligations.
What is Section 44ADA of the Income Tax Act?
In the Budget of 2016, the Finance Minister introduced the presumptive taxation scheme tailored for specific professionals, outlined under Section 44ADA of the Income Tax Act. Starting from the fiscal year 2016-17 onwards, professionals with gross receipts amounting to INR 50 lakhs or less became eligible to avail themselves of the presumptive taxation benefits as per Section 44ADA. Subsequently, in the Budget of 2023, the threshold under Section 44ADA was augmented to Rs 75 lakhs from the previous Rs 50 lakhs. However, this adjustment was subject to the condition that cash receipts should not exceed 5%.
Section 44ADA: Eligibility
Section 44ADA of the Income Tax Act applies to individuals and partnership firms (excluding LLPs) engaged in specified professions. The following professions qualify for the presumptive taxation scheme under this section:
- Medical professionals (e.g., doctors, dentists)
- Legal practitioners (lawyers, advocates)
- Accountants
- Engineers
- Architects
- Technical consultants
- Interior decorators
Other Eligible Professions Include:
- Artists from the film industry, such as:
- Producers, directors, and editors
- Music and art directors
- Actors, singers, and cameramen
- Dance directors and costume designers
- Lyricists, story writers, screenplay or dialogue writers
- Authorised representatives, defined as individuals who represent others before a tribunal or authority for a fee. This excludes:
- Employees of the person being represented
- Individuals practicing accountancy
- Any other professions notified by the CBDT (Central Board of Direct Taxes) from time to time.
Professionals opting for Section 44ADA must ensure that their gross receipts do not exceed ₹75 lakh (or ₹50 lakh if cash receipts exceed 5%) in the relevant financial year to remain eligible for the scheme.
Let’s consider an example:
Arjun, a freelance designer, earned total receipts of 45 lakhs during the financial year 2022-2023. His total expenses amounted to INR 25 lakhs, covering various costs such as software subscriptions, salary, rent, electricity, and travel expenses.
If Arjun chooses not to opt for Presumptive Taxation:
- He will pay tax on INR 20 lakhs as per the applicable slab rates.
- Arjun must maintain books of accounts as per Section 44AA.
- Since his profit is less than 50% of gross receipts and his total income exceeds the basic exemption limit of INR 2.5 lakhs, he must undergo a Tax Audit.
Alternatively, if Arjun opts for Presumptive Taxation under Section 44ADA:
- He will pay tax on INR 22.5 lakhs as per the slab rates.
- Arjun is not required to maintain books of accounts as per Section 44AA.
- Since his profit is at least 50% of gross receipts, he is exempt from Tax Audit requirements.
Income Tax on Presumptive Income under Section 44ADA
- Income under this scheme is classified under the head PGBP (Profits and Gains from Business or Profession) and is taxable at slab rates.
- Taxpayers cannot claim expenses, but they can avail deductions under Chapter VI-A.
Payment of Advance Tax:
- Taxpayers opting for the presumptive taxation scheme under Section 44ADA should pay the entire advance tax amount by March 15 of the financial year. Failure to do so may result in interest levied under Section 234C if the tax liability exceeds INR 10,000.
Income Tax Return Form:
- Taxpayers should report such income as PGBP Income and file Form ITR-4 on the Income Tax Website, mentioning the specified Business and Profession Codes.
Tax Audit and Books of Accounts for Presumptive Income
- Taxpayers reporting income at 50% or more of gross receipts are not required to maintain books of accounts under Section 44AA.
- Tax Audit is applicable if the declared income is less than 50% of gross receipts and the total income exceeds INR 3,00,000, as per Section 44AB(d).
Frequently Asked Questions
1. I am a freelance architect earning ₹70 lakh in FY 2024–25, with 96% of receipts through digital modes. Can I opt for Section 44ADA?
Answer: Yes. Since your gross receipts are within ₹75 lakh and more than 95% are digital, you are eligible for presumptive taxation under Section 44ADA.
2. I earned ₹50 lakh as a legal consultant but incurred ₹35 lakh in expenses. Should I opt for Section 44ADA?
Answer: If your actual profits are less than 50% of gross receipts and you maintain books of accounts, opting out may reduce your tax liability. However, you’ll need to undergo a tax audit if your total income exceeds ₹3 lakh.
3. My gross receipts are ₹40 lakh and I declare 50% income under Section 44ADA. Am I required to maintain books of accounts?
Answer: No. If you declare at least 50% of receipts as income under Section 44ADA, you are exempt from maintaining books of accounts under Section 44AA.
4. I declared income of 30% on ₹50 lakh receipts and my total income is ₹20 lakh. Is tax audit mandatory?
Answer: Yes. Since declared profit is below 50% of receipts and total income exceeds ₹3 lakh, a tax audit is mandatory under Section 44AB(d).
5. I opted for Section 44ADA last year but did not opt for it this year. Will I be barred from using it for the next five years?
Answer: No. The five-year restriction rule applies only to Section 44AD. You are free to opt in or out of Section 44ADA in any year.
6. Can I claim deductions for rent, depreciation, or salaries under Section 44ADA?
Answer: No. Once you opt for Section 44ADA, 50% of gross receipts is deemed as income, and no further deductions for expenses or depreciation are allowed.
7. What is the due date for paying advance tax under Section 44ADA?
Answer: The entire advance tax must be paid on or before March 15 of the financial year to avoid interest under Section 234C.
8. Which ITR form should I use if I have presumptive income under Section 44ADA and no capital gains?
Answer: You should file Form ITR-4, which is meant for individuals and firms opting for presumptive taxation under Section 44ADA.
Read More: Section 44AD: Presumptive Taxation for Business
Web Stories: Section 44AD: Presumptive Taxation for Business
Official Income Tax Return filing website: https://incometaxindia.gov.in/
