Section 44ADA – Presumptive Tax Scheme for Professionals

Did you know that people engaged in various professions such as legal, medical, interior decorators, freelancers etc. can pay income tax on just half of their income. Well, in order to make tax filing simplified for all the professionals,  a scheme for presumptive taxation was introduced under section 44ADA from the FY 2016-17.

To make the most of the presumptive taxation, get an understanding of intricate details of the topic here:

• What is Presumptive Taxation
• Latest Budget Update 2024
• Introduction to section 44ADA of the IT Act, 1961
• Assessee eligible for section 44ADA
• Professions eligible for section 44ADA
• Maintenance of books of accounts and audit applicability
• Presumptive Income Calculation
• Examples on Presumptive Income 
• Implications of choosing Presumptive Taxation

What is Presumptive Taxation? 

A presumptive taxation is a system in which a government assumes a certain percentage of your turnover/gross receipts as your taxable income irrespective of the expenses incurred. Section 44ADA provides a simple method of taxation for small professionals. Section 44ADA offers a scheme of presumptive taxation for 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 (This limit is Rs.75 lakh, provided 95% of the receipts are through recognised banking channels).

Latest Update

The Budget 2023 revised presumptive taxation limits under Sec 44AD and Sec 44ADA from FY 2023-24 (AY 2024-25) as follows:

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

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.

Assessees Eligible for Section 44ADA

The following assessees are eligible for Section 44ADA:

• Individuals
• Partnership firms (note that limited liability partnerships are not eligible to opt for Section 44ADA)

Which Professions are Eligible 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
  • 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

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.

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

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 of 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 purposes shall be calculated as of the depreciation has been allowed each year. This WDV would be the value of the asset for tax purposes in a case where the asset is sold later by the assessee.