Important Keyword: Business and Profession Income, Presumptive Taxation Scheme.

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

Under Section 44ADA of the Income Tax Act, a resident in India engaged in certain specified professions can avail themselves of the benefits of the Presumptive Taxation Scheme. These professions include legal, medical, engineering, architecture, accountancy, technical consultancy, interior decoration, film artists, and authorized representatives. However, starting from the Assessment Year 2021-2022, only individuals and partnership firms, excluding Limited Liability Partnership Firms, are eligible to opt for the scheme.

To qualify for the Presumptive Taxation Scheme two conditions must be met:

1. Gross receipts of the profession should not exceed INR 75 lakhs.
2. The taxpayer must report 50% or more of the gross receipts as income in the Income Tax Return (ITR).

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 2,50,000, as per Section 44AB(d).

Read More: Section 44AD: Presumptive Taxation for Business

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Official Income Tax Return filing website: https://incometaxindia.gov.in/