A scheme for presumptive taxation was introduced under section 44ADA from the 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.
Budget 2023 Update
The Budget 2023 revised presumptive taxation limits under Sec 44AD and Sec 44ADA from FY 2023-24 (AY 2024-25) as follows:
Category | Previous limits | Revised limits |
Sec 44AD: For small businesses | Rs. 2 crore | Rs. 3 crore* |
Sec 44ADA: For professionals like doctors, lawyers, engineers, etc. | Rs. 50 lakh | Rs. 75 lakh* |
*The increase in limits is subject to a condition that the 95% of the receipts must be through online modes.
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 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 are presumed at 50% of the gross receipts.
The following Indian assessees are eligible:
Professionals engaged in the following professions are eligible:
The following conditions must be met to choose the Presumptive Taxation Scheme under Section 44ADA of the Income Tax Act:
Illustration 1:
Mr Ram is a freelance interior decorator. His total receipts for the financial year 2023- 24 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 the presumptive scheme as below:
Under normal provisions
Gross receipts | Rs 30,00,000 |
Less: Expenses | Rs 10,00,000 |
Net profit | Rs 20,00,000 |
Under Presumptive scheme
Gross receipts | Rs 30,00,000 |
Presumptive income at 50% of the gross receipts | Rs 15,00,000 |
Net profit chargeable to tax | Rs. 15,00,000 |
In the above case, 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.
Illustration 2:
Geeth is a medical practitioner, whose total gross receipts are Rs. 55,00,000, and cash receipts are Rs. 2,50,000. The yearly expense of hers is Rs. 9,00,000.
Here’s how we can compute the net income chargeable to tax under the presumptive taxation scheme.
Total gross receipt | Rs. 55,00,000 ( this is under the increased/ revised limit of Rs.75 lakh) |
Cash receipts ( i.e, it should be less than 5% of the total receipts) | Rs. 2,50,000 (which is less than 5% of total receipts ) |
Presumptive income chargeable to tax | Rs. 27,50,000 ( 50% of the gross receipts) |
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 professional can opt for the presumptive taxation scheme under section 44ADA. And the taxable income chargeable is 50% of the total receipts.
By following Section 44ADA, an assessee would get the following benefits:
If an assessee meets the following criteria, then they must maintain books and get accounts audited under section 44AB:
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.