Section 44ADA – Presumptive Tax Scheme for Professionals

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 for FY 2023-24 (AY 2024-25) as follows:

*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 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

Presumptive Income Calculation under Section 44ADA of Income Tax

The following two conditions must be met in order 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.
• In the ITR, the taxpayer must record 50% or more of the gross receipts as income.

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 the presumptive scheme as below:

Under normal provisions

Under Presumptive scheme

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 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
• 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.

FAQs

Which ITR form should I file for the presumptive taxation scheme?

Taxpayers who choose presumptive taxation under Section 44ADA should report such income as PGBP Income and file Form ITR-4 on the IRS website. They must include the appropriate Business and Profession Codes for the type of the profession. If the taxpayer has capital gains income in addition to presumptive income, he or she should submit Form ITR-3.

Do I need to maintain books of accounts?

If a taxpayer claims income that is less than 50% of gross receipts and the total income exceeds INR 2,50,000 (basic exemption level), he or she must keep books of accounts and have them audited under Section 44AB(d).

I am a freelancer and I opted for Presumptive Scheme u/s 44ADA. Can I claim expenses like internet, rent, travelling, etc.?

A freelancer who has chosen the Presumptive Scheme under Section 44ADA must disclose 50% of gross revenues as income. It is possible to report a fixed percentage of receipts as profit while not keeping any books of accounts. As a result, the freelancer is unable to claim any further expenditures. He or she can, however, claim Chapter VI-A deductions such as LIC premiums, mediclaim premiums, donations, and so on.

Is it necessary for me to pay advance tax if I choose the Presumptive Taxation Scheme under Section 44ADA?

Yes. You must pay advance tax if your total tax due for the fiscal year exceeds INR 10,000. If you have chosen a presumptive taxation scheme under section 44AD or 44ADA, you must pay advance tax on or before March 15th instead of four payments in other situations. However, if you fail to pay advance tax by the 15th March of the fiscal year, you must pay interest under Sections 234B and 234C.

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