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Section 44ADA – Presumptive Tax Scheme for Professionals

Updated on: Mar 7th, 2024

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13 min read

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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.

What is Section 44ADA of the Income Tax Act?

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.

Assessees eligible for the Section 44ADA

The following Indian assessees are eligible:

  • Individuals
  • Partnership firms (note that limited liability partnerships are not eligible)

Who is eligible for 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 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

Presumptive Income Calculation under Section 44ADA of Income Tax

The following conditions must be met to choose the 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 income.

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. 

What benefits will an assessee get by following Section 44ADA?

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

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

If an assessee meets the following criteria, then they 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. 
  • The 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 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.

Frequently Asked Questions

What is the exemption under section 44ADA ?

Professionals mentioned in the section can pay tax on their gross receipts under section 44ADA, and they can opt for this scheme only if their total income does not exceed Rs.75 lakhs under the revised /increased limit. 

Which ITR form is applicable for 44ADA ?

Taxpayers can file return in the ITR -4 form (Sugam)  for those who opt for the presumptive taxation under section 44AD, 44ADA, and 44AE.

Can 80C deduction be claimed under section 44ADA?

Despite opting for presumptive scheme under section 44ADA, taxpayer can claim section 80 tax saving deductions and investments.

Is the partner’s salary allowed under the section 44ADA?

Deduction of remuneration is not allowed if the firms income are taxed under the presumptive taxation section 44AD or 44ADA.

Is audit mandatory for presumptive taxation?

After opting for presumptive taxation, if your income goes beyond the set limit then you have to get your books audited.

Who cannot opt for the 44ADA?

If the professionals claim their income to be less than 50% of their gross total receipts and also if they exceed the set limit, then they cannot opt for presumptive taxation.

Is 44ADA compulsory for up to 5 years?

As a discouraging provision the professionals who opt for 44ADA presumptive taxation have to be followed up to 5 years compulsorily.

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