Section 44ADA was added to the Income Tax Act in 2017 as part of the presumptive taxation scheme. It was introduced with the aim to help self-employed professionals get the benefit of a taxation scheme that was simpler and reduced the burden of compliance as compared to the earlier system. Section 44AE and Section 44AD were added as part of the presumptive taxation scheme before Section 44ADA was inserted at a later date. Under rules and regulations of this section small taxpayers do not need to maintain book of accounts and profits can be calculated as a percentage of the total sales made in a financial year.
What are the Key Objectives of Section 44ADA?
Here are the key objectives of Section 44ADA under the Presumptive Taxation Scheme:
- To simplify the tax system for small self-employed professionals
- To reduce the tax compliance burden on self-employed professionals
- To ease the process of doing business for self-employed professionals
- To create parity between small businessmen covered under Section 44AD and professionals who were not covered by Section 44AD of the Income Tax Act
Which Types of Assessees are Covered Under Section 44ADA of the Income Tax Act, 1961?
The professionals eligible to opt for the Presumptive Taxation Scheme under Section 44ADA are required to belong to one of the following professions as mentioned here:
- Engineers
- Legal services
- Architecture
- Accountants
- Medical services
- Technical consultants
- Interior Decorators
- Any other Professionals as specified by the Central Board of Direct Taxes (CBDT)
Under the rules specified in this section, these are the professionals who are beneficiary of Section 44ADA as long as their annual income does not exceed Rs. 50 lakhs. It is also important to mention that Section 44ADA under the Presumptive Taxation Scheme is only applicable to residents who are Individuals, Hindu Undivided Families (HUF) or Partnerships excluding Limited Liability Partnership (LLP) and Limited Liability Partnership Firms.
What is the Rate of Presumptive Tax Specified by Section 44ADA?
The income of professionals covered under Section 44ADA is considered to be 50% of the total gross receipts from profession for the applicable financial year. This figure has been deduced based on the assumption that these professionals usually incur lower expenses during a financial year as compared to self-employed businessmen. Under Section 44ADA, eligible professionals are also allowed to declare a higher income in excess of 50% of gross receipts, if they so desire.
What are the Key Rules for Opting Out of this Scheme?
When professionals claim that their income is less than 50% of the total gross receipts and if the total income exceeds the basic exemption limit, they cannot be qualified to be classified under Section 44ADA. In such a case, they will have to maintain books of accounts to as per Section 44AA and these have to be audited as per Section 44AB.
In contrast to the restrictions placed on businesses that have opted for the Presumptive Taxation Scheme under Section 44AA, professionals that fall under the Section 44ADA of the Income tax Act can opt-in or opt-out of the scheme at any time. In short, the 5-year restriction applicable to certain types of tax payers is not applicable to them.
Benefits of Filing Returns under Presumptive Tax
The following are some of the key benefits for professionals opting for presumptive taxation under Section 44ADA
- It eases the tax filing process: One of the main reasons why professionals choose to opt for the presumptive tax scheme u/s 44ADA is that the tax form is much shorter and simpler as compared to a complex ITR forms for filing taxes under other sections of the income tax act.
- It helps save money: Tax consultants can charge exorbitant amounts to file tax returns for self-employed individuals due to the complicated filing requirements involved. On the other hand, u/s 44ADA, professionals can file returns on their own due to the simpler ITR form requirements and this can save self-employed professionals a lot of money.
- It potentially reduces tax liability: Professionals can declare 50% of income as profit and the balance as expense to save tax since they have relatively few expenses to declare. The only condition here is that the total income for the financial year should be less than Rs. 50 lakh. If income exceeds this limit, the tax assessee will not qualify for Section 44ADA benefits.
Frequently Asked Questions (FAQs):
Q. I am a professional with earnings from a foreign client. Should I pay tax on this income?
Yes. It does not matter if you are being paid by a client in India or abroad. As a resident Indian, you are receiving income in India and it is eligible to be taxed in India.
Q. I am a salaried individual with income from freelancing work. Do I have to pay taxes on this?
Many salaried employees with a regular day job do additional freelance or consulting work in addition to their job. In such cases, the income from their salary as well as freelance or consulting work will be added to get the total amount of income earned during a financial year.
Taxation on this amount is computed in the regular way based on the applicable tax slab rates. However, the good news is that you can avail the benefit of presumptive taxation u/s 44ADA and add only half of your freelance income to your salary income.
Q. Are there any restrictions on opting out of the Presumptive Taxation Scheme under Section 44ADA?
No. You can opt-in and opt-out of the presumptive taxation scheme at your convenience if you are covered by the various eligibility criteria specified by Section 44ADA of the Income Tax Act.