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Presumptive Tax – Easiest way to File Returns & Save Taxes for Creative Professionals

Updated on: Feb 16th, 2023


10 min read

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Budget 2023 update:

Budget 2023 has amended Sec 44AD and Sec 44ADA to revise presumptive taxation limits for FY 2023-24 (AY 2024-25) as follows:

CategoryPrevious limitsRevised limits
Sec 44AD: For small businessesRs. 2 croreRs. 3 crore*
Sec 44ADA: For professionals like doctors, lawyers, engineers, etc.Rs. 50 lakhRs. 75 lakh*

Budget 2021 update: Section 44ADA applied to all the assessees being residents in India. Now onwards, it applies only to the resident individual, Hindu Undivided Family (HUF) or a partnership firm, other than LLP.

If you’re a freelancer, professional or consultant, you can actually pay income tax on only half of your gross annual income. You can do this by using the Presumptive Taxation Scheme under Section 44ADA of the Income Tax Act. The only caveat is that your total income for the year should be less than ₹50 lakh.

Let’s dig deeper with a jargon-free, easy-to-understand example. Shweta is a successful model. She earned an income of ₹40 lakh in FY2022-23, that is between 1st April 2022 and 31st March 2023. ₹40 lakh is a lot of money, but it also leads to a lot of tax. In the normal course of things, without using the benefit of presumptive tax, Shweta’s taxable income (the amount she would need to pay tax on) would be something like this.

Taxable income without using presumptive taxation scheme 

Total gross income for the year from various assignments and projects₹40 lakh

Work-related expenses that she plans to claim as tax deductions

  • Travel expenses
  • Meeting expenses
  • Communication expenses
₹10 lakh
Total taxable income (gross income – expenses)₹30 lakh

If there was no presumptive taxation scheme, Shweta would pay income tax on ₹30 lakh. But by availing the benefit of presumptive taxation, she can show her taxable income to be half of her gross income–that is ₹20 lakh.

Taxable income after availing presumptive taxation scheme

Total gross income for the year from various assignments and projects₹40 lakh
Presumed taxable income after availing presumptive taxation scheme₹20 lakh

The presumptive taxation scheme allows her to save tax on ₹10 lakh. Let’s calculate how much tax she would actually save.

Without presumptive taxationWith presumptive taxation
Taxable income - ₹30 lakhTaxable income - ₹20 lakh
Tax calculation as per Income Tax slabs for FY 2022-23Tax calculation as per Income Tax slabs for FY 2022-23
Up to ₹2.5 lakh₹0Up to ₹2.5 lakh₹0
From ₹2.5 lakh to ₹5 lakh₹12,500From ₹2.5 lakh to ₹5 lakh₹12,500
From ₹5 lakh to ₹10 lakh₹1,00,000From ₹5 lakh to ₹10 lakh₹1,00,000
From ₹10 lakh to ₹30 lakh₹6,00,000From ₹10 lakh to ₹20 lakh₹3,00,000

As is apparent, by using the presumptive taxation scheme, Shweta will be able to save ₹3 lakh in taxes. That is, she will have to pay ₹3 lakh less as income tax. Do note that 4% cess would be added to the taxable income in both cases.

Furthermore, all Section 80 tax-saving deductions and investments can also be claimed over and above the presumptive taxation scheme. This presumptive taxation scheme under Section 44ADA can be availed by freelancers, professionals and consultants who earn an income by providing their services and expertise.

But what if you maintained proper books of accounts and your net taxable income is less than half of your gross total income? In Shweta’s example, this would mean that her work-related expenses were higher and her taxable income came down to ₹15 lakh. This is less than half of her total gross income. In such a case, you should not avail the presumptive taxation scheme and pay tax on the taxable income after getting your books of account audited.

However, such cases would be few and far between. Typically, freelancers and professionals do not have a lot of work-related expenses to claim. Hence, the presumption of 50% of your total income being your profit works out in their favour under Section 44ADA.

Foreign income should also be included

This is a confusion that creative professionals usually have. Whether the income they make from a foreign client is taxed in India or not? The answer is ‘YES’. As an Indian resident, you are receiving income in India, hence your global income will be taxed in India.

What is Presumptive Taxation?

For professionals, government has introduced a new scheme of presumptive taxation (Section 44ADA), under which professionals can file their return declaring 50% of their gross receipts (which must be up to ₹50 lakhs) as income, and after deducting section 80 deductions, professionals need to pay tax on balance total income.

The creative professionals who are specified to be eligible to opt for this scheme are architectural professional, interior decorator, advertiser or technical consultant.

If you receive income from a foreign client in your foreign bank account, even then it will be taxed in India, if you are an Indian resident.

If you are paying taxes on your foreign income in that foreign country, then you can claim tax relief on taxed income (which was taxed twice), while filing return in India as per DTAA, entered between India and that particular foreign country.

Presumptive Taxation involves the use of indirect methods to compute tax liability, where the taxable income is calculated based on assumptions instead of actuals. Here, the professional is required to declare a given percentage of gross receipts of professional income as its income, and pay a fixed percentage of it as tax.

As per Finance Act 2016, professionals (as notified by CBDT) with gross receipts up to ₹50 Lakhs for the period April 1st, 2016 to March 31st, 2017, can opt for presumptive taxation. Also applicable for all financials years after financials years 2016-17.

Three Benefits to File Returns under Presumptive Tax

  • Easy to File: The tax form is much shorter and simpler as compared to a complex 30 pages ITR form for filing.
  • Save Money: Professionals can now file tax returns on their own instead of paying a tax consultant. Typically, consultants charge anywhere from Rs. 5000 – 15000 for such filings. ClearTax offers the same service for much less.
  • Save Tax: Usually, professionals do not have much expenses to declare. By declaring 50% of income as profit and balance as expense, a lot of tax saving can be done.

What if you have a day job and do freelancing work on the side?

It is often the case that salaried employees with a regular day job do additional freelance or consulting work as well in their free time. In such a case, can they also benefit from the presumptive taxation scheme?

The answer is yes. When you have a job and also do freelance work, you have two kinds of incomes–salary income and non-salary income. Since both forms are an income, you have to pay tax on both. Taxation on the salary income is computed in the regular way. You need to add your freelance income to this salary income to compute your total taxable income for the year. While doing this, you can use the benefit of presumptive taxation and add only half of your freelance income to your salary income.

For example, if your salary income is ₹20 lakh and your freelance income is ₹10 lakh, you can use presumptive taxation and add only half of the latter to your total income. This way, your total income for the year will be ₹25 lakh. Remember that in such a case, you will have to use ITR-4 to file your income tax returns.

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