Presumptive Tax - Easiest Way to File Returns & Save Taxes for Lawyers

Every assessee who has a total income exceeding the basic exemption limit has to pay tax and file an income tax return. To ease the taxation for professionals, presumptive taxation under Section 44ADA was introduced. This allows eligible professionals to calculate their taxable income as 50% of their gross turnover. The section covered various professions such as lawyers, chartered accountants, doctors etc. 

There are distinct types of incomes that lawyers earn, which are taxable under different heads of income. In this article, we will discuss the applicability of presumptive taxation for lawyers.   

Income from Practice

Many of the lawyers opt to practice law rather than opting for a job. Income derived from practice is taxable under the head of ‘income from profession.’ You can file taxes under normal provisions of tax where you can claim expenses incurred for your deduction. For the professionals, the Government has introduced a new scheme of presumptive taxation. Under the scheme, professionals can file their return declaring 50% of their gross receipts as income (if the professional income is up to Rs. 50 lakhs or Rs. 75 lakhs as the case may be) under Section 44ADA, and after deducting section 80 deductions, professionals need to pay tax on the balance total income at slab rates.

The turnover limit for presumptive taxation has been increased for professional income up to Rs. 75 lakhs in a year if the cash receipts do not exceed 5% of the total receipts.

Income from Advisory

Even non-practicing lawyers provide advisory services. Income from such advisory services is also considered as professional income. As per the new scheme of presumptive taxation for professionals (Section 44ADA), a non-practicing lawyer can’t opt for a such scheme because it is only for practicing legal professionals. In that case, you are required to pay taxes on such income as per the normal provisions.

Income from a Law Firm

If the lawyer is on the payroll of a law firm, then his income will be treated as ‘salary.’ If he is working on a contract basis in his professional capacity, then the income from such an activity is considered professional income. But again, if the lawyer is in practice, only then can he opt for a presumptive taxation scheme. Salary and other perquisites will be taxable under the head salary. 

What Are The Benefits Of Filing Returns Under Presumptive Tax?

• Easy to File: The tax form is much shorter and simpler as compared to a complex 30-page form for filing.
• Save Money: Lawyers can now file tax returns on their own instead of paying a tax consultant. Typically, consultants charge anywhere from Rs. 5000 – Rs. 15000 for such filings
• Save Tax: Usually, lawyers do not have many expenses to declare. By declaring 50% of income as profit and the balance as an expense, a lot of tax savings can be done.
• Books of Accounts: No books of accounts are required to be maintained if you opt for presumptive taxation.

Considerations for Audit and Foreign Income  

If you opt for presumptive taxation then you need to file ITR-4, in other cases, you need to file ITR-3. Further, as per income tax laws, if gross receipts from a profession exceed Rs. 50 lakhs, then it is mandatory to get the books audited.

However, professionals are mandated to keep books of account and get it audited if the income disclosed by professionals is less than 50% of gross receipts, and the total income exceeds Rs. 250,000. Even if the lawyer is settled abroad and is providing services in India, he has to pay taxes in India to earn income on his profession. However, he can’t opt for presumptive taxation because the scheme is only for resident professionals and partnership firms.

Conclusion

Presumptive Taxation allows eligible professionals to calculate their taxable income as a percentage of their gross receipts. This also exempts professionals from maintaining books and other compliance requirements. One such eligible professionals are lawyers. However, it is necessary to comply with the provisions of the section to avoid any scrutiny from the tax authority.