Section 44ADA – Presumptive Tax Scheme for Professionals

Professionals like Lawyers, Doctors, Interior Decorators etc. having turnover up to Rs. 50 lakhs are exempted from maintaining books of accounts under presumptive taxation scheme under section 44ADA. They can just report their turnover, and calculate profits as half the turnover, and pay taxes on the profits under slab rates.

Key Highlights

• If the sales are fully digital, professional with turnover up to Rs. 75 lakhs can opt for presumptive taxation scheme.
• 50% of the turnover should be reported as profits under section 44ADA.
• This scheme is applied only for professionals specified under the relevant income tax rules (eg. Engineers, Chartered Accountants, etc.)   

What is Presumptive Taxation? 

As the name suggests, under presumptive taxation scheme, a certain percentage of turnover is directly presumed as your income, without elaborate calculation of profits, after considering all the deductions.

Under the Income Tax Act, section 44AD and 44ADA deals with presumptive taxation. 

What is Section 44ADA of the Income Tax Act?

Section 44ADA is a special provision for calculating the taxable income for 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 available only to small businesses. 

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

Presumptive Taxation Limits

The presumptive taxation limits for FY 2024-25 (AY 2025-26) is as follows:

*The increase in limits is subject to a condition that 95% of the receipts must be through recognized banking channels (i.e., through account payee cheque, demand draft, electronic clearing system or other recognized modes).

Eligibility for Section 44ADA

Individuals and partnership firms are eligible for presumptive taxation under section 44ADA. Limited Liability Partnerships (LLPs) are not eligible to opt for Section 44ADA. Persons engaged in the following professions are eligible:

• Interior decorators
• Technical consultants
• Engineering
• Accounting
• Legal
• Medical
• Architecture
• Other professionals, as mentioned below:
  • Movie artists include producers, editors, actors, directors, music directors, art directors, dance directors, cameramen, singers, lyricists, story writers, screenplay or dialogue writers and costume designers
  • Authorized 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

Presumptive Income Calculation under Section 44ADA of Income Tax

The following conditions must be met to opt for presumptive taxation scheme under Section 44ADA of the Income Tax Act:

• The profession's gross receipts should be less than or equivalent to INR 50 lakh. 
• The limit is increased to INR 75 lakhs if the total amount received in cash does not exceed 5 percent of the total gross receipts of such previous year.
• In the ITR, the taxpayer must record 50% or more of the gross receipts as taxable income.

Examples for Presumptive Scheme for Professionals under section 44ADA

Example 1:
Mr Ram is a freelance interior decorator. His total receipts for the financial year 2023-24 are Rs. 30 lakhs. His total annual office expenses are Rs 10 lakh towards rent, conveyance, telephone, travelling etc.

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

In the above case, Mr Ram can opt for presumptive taxation if the tax is paid on 50% of gross receipts. Hence, Ram can opt to pay tax under the presumptive scheme of taxation under section 44ADA. 

Example 2: 

Geeth is a medical practitioner, whose total gross receipts are Rs. 55,00,000, and cash receipts out of the same is Rs. 2,50,000. The yearly expense incurred to earn the professional income is Rs. 9,00,000.

Here’s how we can compute the net income chargeable to tax under the presumptive taxation scheme.

In the above illustration, the total receipt is below the revised/increased presumptive limit of Rs. 75 lakh and the cash receipt is less than 5% of the total receipts. Hence the taxpayer can opt for the presumptive taxation scheme under section 44ADA and the taxable income chargeable is 50% of the total receipts. 

Benefits of Section 44ADA

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

• No need to maintain books required under Section 44AA
• No requirement to have accounts audited under Section 44AB

When Shall an Assessee Maintain Books of Account and get the Accounts Audited?

If an assessee meets any of the following criteria, then they must maintain books of accounts and get accounts audited under section 44AB:

• Gross receipts is more than Rs.50 lakhs (the limit is increased to Rs.75 lakhs if the cash receipt is within 5% of the total gross receipts of such previous year) in the previous year. or

Income from the profession is offered at a lower rate than 50% of the gross receipts (i.e., the expenses to be claimed is more than 50% of the gross receipts) and the total income is more than the basic exemption.
Related Articles:
1. Section 44AD - Presumptive Scheme for Businesses
2. Section 44BBD of Income Tax Act: Presumptive Taxation for Non-Residents