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

Section 44AB of the Income Tax Act, 1961 requires professionals and businesses to keep a record of their accounting transactions under certain circumstances and specific conditions. This bookkeeping can appear cumbersome to small businessmen and professionals as it requires the investment of time and money. Therefore, to ease the burden of maintaining the book of accounts, the Income Tax Act, 1961, comes up with the Presumptive Taxation Scheme under Section 44AD, 44ADA, 44AE. Here, we will learn about the Presumptive Taxation Scheme under section 44ADA.

What is Presumptive Taxation?

Simply put, Presumptive taxation is paying taxes on a certain percentage of revenue or gross receipts. The taxable income calculated according to the Presumptive Taxation scheme is then taxed according to the normal slab rates. The presumptive Taxation Scheme of the Income Tax Act, 1961, under section 44ADA applies to professionals, interior decorators, freelancers, doctors, and others as specified in Section 44AA. Under this scheme, professionals are not required to keep books of accounts, which helps them focus on their profession. 

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 their income and pay a fixed percentage of it as tax.

So, let's dig deeper into the Presumptive Taxation Scheme under Section 44ADA. 

Eligibility To Qualify Under Section 44ADA

Let’s first understand the persons who can be included under Section 44ADA:

• Assessee being an individual, or partnership firm other than a limited liability partnership (LLP).
• Resident of India.
• All persons engaged in legal, medical, architectural, engineering, accountancy, technical consultancy, interior decoration profession or any other profession as notified by the Central Board of Direct Taxes (CBDT) in the official gazette.

Provisions Under Section 44ADA

The provisions under Section 44ADA are as follows:

• An assessee whose total gross receipts do not exceed Rs. 50 lakh may opt to calculate his income on the presumptive basis of 50% of the total gross receipts.
• According to the Finance Act 2023, an amount exceeding Rs. 50 lakh and up to Rs. 75 lakh is eligible under section 44ADA in the case of an assessee whose total cash receipts out of the gross receipts from his profession during the previous year account for not more than 5% (with effect from 1 April 2024). This means that at least 95% of the transactions from the gross receipts during the previous year are made via digital mode.
• If an assessee claimed his profits out of a profession to be less 50% of the gross receipts and total income exceeds the basic exemption limit, he is required to maintain his books of accounts under section 44AA and get his accounts audited under section 44AB.
• An assessee must pay the advance tax on or before 15th March of the financial year if his tax liability exceeds Rs. 10,000 for the year.
• If an assessee has once opted for the Presumptive Taxation Scheme, he can not opt out of the scheme before five years. If he opts out of the scheme before the period mentioned above, he will not be able to avail of the benefits of the Presumptive Taxation Scheme for the next five assessment years.
• No deductions under the provisions of sections 30 to 38 to an assessee, including unabsorbed depreciation, are allowed.
• The written-down value of assets used for the purpose of the profession has to be calculated as if the taxpayer had claimed and allowed the deduction for depreciation for all relevant years. This is done to determine the capital gain or loss on assets if the asset is sold in the future year.

Let's take an example. Shweta is an interior decorator. Her gross receipts out her profession is ₹40 lakh in FY 2024-25.

The gross receipt of Shweta is Rs. 40 lakh, which is less than Rs. 50 lakh. Therefore, she can opt for the Presumptive Taxation Scheme under section 44 ADA.  According to section 44ADA, her presumptive profit is 50% of her gross receipts. Her presumptive profit/ taxable income is Rs. 20 lakhs.

Let's try to understand by taking another example: Mr. Ravi is a legal consultant. His gross receipt for the previous year is Rs. 60 lakh. The cash receipt out of the gross receipt during a previous year is Rs. 1,80,000. Let’s see if he can benefit from the Presumptive Taxation Scheme of section 44ADA.

Lets check if Mr. Ravi is eligible to avail the benefits of the Presumptive Taxation Scheme under section 44ADA

Since Ravi’s gross receipt is Rs. 60 lakh less than Rs. 75 lakh. Also, he meets the second criterion of having cash receipts less than 5 % of the total receipts. Therefore, he can avail the benefit of the Presumptive Taxation Scheme under section 44ADA.

Does Foreign Income Qualify For the Presumptive Taxation Scheme?

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.

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.

Benefits under the Presumptive Taxation Scheme

Simpler

Filing taxes under the Presumptive Taxation Scheme is simpler as it prevents taxpayers from maintaining a book of accounts and getting them audited.

Time Saving

Now, taxpayers do not have to deal with complex calculations to arrive at taxable income, which helps them save time.

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.

Related Articles

• Section 44ADA
• Section 44AD – Presumptive scheme to be opted for at least 5 years
• Presumptive Income- Form ITR-4 
• Revised Income Tax Return