Section 44ADA – Presumptive Tax Scheme for Professionals

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A scheme for presumptive taxation was introduced under section 44ADA from the FY FY 2016-17.

Section 44ADA provides a simple method of taxation for small professionals. Section 44ADA offers a scheme of presumptive taxation of profits and gains arising from professions mentioned under Section 44AA(1) of the Income Tax Act, 1961.

The benefit of section 44ADA can be taken only by those specified professionals whose annual gross receipts are under Rs 50 lakh.

Latest Update

Union Budget 2021 Outcome:

The threshold limit of tax audit for businesses is extended from Rs. 5 crores to Rs. 10 crore w.e.f. A.Y. 2021-22 where digital transactions are not less than 95 per cent of total transactions.

Scope and purpose of Section 44ADA

Section 44ADA is a special provision for calculating the profits and gains of small professionals in certain circumstances.

Section 44ADA was introduced to extend the scheme of simplified presumptive taxation to specified professionals. Earlier, the presumptive scheme of tax was applicable only for small business.

The presumptive scheme of taxation reduces compliance burden on small professions and facilitates ease of doing business. Under the presumptive scheme of taxation, profits are presumed at 50% of the gross receipts.

Assessees eligible for the Section 44ADA

The following Indian assessees are eligible: Individuals Hindu undivided families (HUFs) Partnership firms (note that limited liability partnerships are not eligible)

Who are the eligible for section 44ADA

Professionals mentioned under Section 44AA of the Income Tax Act, 1961, whose total gross receipts are less than Rs 50 lakh in a year are the eligible beneficiaries.

Latest Update

Union Budget 2021 Outcome:

The presumptive taxation scheme under section 44ADA was previously applied to all the resident professionals referred to in section 44AA. Now onwards, it applies only to the resident individual, Hindu Undivided Family (HUF) or a partnership firm, other than LLP.

Eligible professionals under Section 44ADA

Professionals engaged in the following professions are eligible:

  • Interior decorations
  • Technical consulting
  • Engineering
  • Accounting
  • Legal
  • Medical
  • Architecture
  • Other professionals, as mentioned below:
    • Movie artists includes a producer, editor, actor, director, music director, art director, dance director, cameraman, singer, lyricist, story writer, screenplay or dialogue writer and costume designers
    • Authorised representative means a person who represents another person for a fee before a tribunal or any authority constituted under any law. It does not include an employee of the person so represented or a person who is carrying on the profession of accountancy
    • Any other notified professionals

What is the presumptive income offered?

Higher of the following is offered as presumptive income: 50% of the total receipts from the profession Income offered by the assessee from the profession.

Illustration:
Mr. Ram is a freelance interior decorator. His total receipts for the financial year 2018-19 are Rs 30 lakh. His annual expenses are Rs 10 lakh towards rent, conveyance, telephone, travelling etc.

Here, we can compare his taxable income under normal provisions and presumptive scheme as below:

Under normal provisions

Gross receipts 30,00,000
Less: Expenses 10,00,000
Net profit 20,00,000

Under Presumptive scheme

Gross receipts 30,00,000
Less: 50% deemed expenses 15,00,000
Net profit 15,00,000

In the above case, the net profit under the presumptive scheme is lower than the normal provisions. Hence, it is beneficial for Mr Ram to offer his income under the presumptive scheme of taxation under section 44ADA.

What benefits will an assessee get by following Section 44ADA

By following Section 44ADA, an assessee would get the following benefits:

  • No need of maintaining books required under Section 44AA
  • No requirement of having accounts audited under Section 44AB

When shall an assessee maintain books and get the accounts audited?

If an assessee meets the following criteria, then he/she must maintain books and get accounts audited under section 44AB:

  • Income from the profession is offered at a lower rate than 50% of the gross receipts
  • Total income of the assessee is more than the basic exemption

Implications of choosing section 44ADA

All deductions for business expenses are deemed to have been allowed. Once profits are taxed at 50% of the gross receipts, the balance 50% is deemed to be allowed towards all the business expenses of the assessee.

Business expenses may include consumables, cost of services taken from another professional, daily expenses, books, stationery, telephone charges, depreciation on assets (laptop, vehicle, printer etc.) and any other expense incurred to carry on the profession.

The written down value (WDV) of assets for tax purpose shall be calculated as of the depreciation has been allowed each year. This WDV would be the value of the asset for tax purpose in a case where the asset is sold later by the assessee.

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