A scheme for presumptive taxation was introduced under section 44ADA from the FY 2016-17.

Objectives of Section 44ADA

The following are some of the main objectives of Section 44 ADA under the Presumptive Taxation Scheme:

1. To simplify the tax system
2. To reduce the compliance burden
3. To facilitate the ease of doing business for small professionals
4. To bring parity between small businessmen (under Section 44AD) and small professionals

Assessees eligible for the Section 44ADA

The following Indian assessees are eligible: 

1. Individuals 
2. Hindu undivided families (HUFs)
3. Partnership firms

Note that limited liability partnerships are not eligible

Professionals mentioned under Section 44AA of the Income Tax Act, 1961, whose total gross receipts are less than Rs 50 lakh in a year, are the eligible beneficiaries.

Eligible professionals under Section 44ADA

Professionals engaged in the following professions are eligible:

1. Interior decorations
2. Technical consulting
3. Engineering
4. Accounting
5. Legal
6. Medical
7. Architecture
8. Other professionals, as mentioned below:
9. Movie artists include a producer, editor, actor, director, music director, art director, dance director, cameraman, singer, lyricist, story writer, screenplay or dialogue writer and costume designer.
10. 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.
11. Any other notified professionals

Opting out of the Scheme under Section ADA

Unlike the restriction placed on businesses that have opted for the scheme under Section AD, the professionals under Section ADA can opt-in and opt out at any time. The professionals can do so without the five-year restriction.

What is the presumptive income offered?

Higher of the following is offered as presumptive income: 50% of the total receipts from the profession Income provided by the assessee from the profession.

Illustration:

Mr Ram is a freelance interior decorator. His total receipts for the financial year 2018-19 are Rs 30 lakh, and his annual expenses are Rs 10 lakh towards rent, conveyance, telephone, travelling etc.

Here, we can compare his taxable income under normal provisions and 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 taxation scheme under section 44ADA.

What benefits will an assessee get by following Section 44ADA

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

1. Hassle-free filing process

The tax filing process is relatively short and straightforward when pitted against other ITR forms, and it not only helps to save a lot of time and energy but also reduces the scope of making any mistake to a great extent.

1. Reduction in tax liability

Under normal circumstances, professionals do not have a substantial amount of expenses to declare. Nonetheless, by declaring 50% of the earnings as profit and the remainder as expenses, one can save on taxes successfully.

1. Scope of saving money

The simple tax filing process and hassle-free steps encourage individuals to file income tax returns on their own. This eliminates the need for individuals to seek the assistance of professional tax consultants. Generally, tax consultants can charge as much as Rs.5000 to Rs.15000 for filing income tax on behalf of taxpayers.

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:

1. Income from the profession is offered at a lower rate than 50% of the gross receipts.
2. The total income of the assessee is more than the basic exemption

Things to Consider Before Opting for Section 44ADA

It is suggested that one must weigh in these factors before adopting this tax provision –

1. The amount of one’s actual expenditure. Financial experts often recommend professionals with a low net profit ratio to avoid this tax provision.

2. There is no such provision in Section 44ADA of the Income Tax Act that allows professionals to deduct remuneration paid to partners from any presumptive income.

3. Even if a professional firm does not adopt this tax provision, its partners can still opt for Section 44ADA in terms of interest or salary received for the same firm.

4. Unlike some specific types of taxpayers, professionals who had previously chosen this tax provision can opt out of it at any time.

Keeping all these aspects in mind, one can decide whether to opt for Section 44ADA of the Income Tax Act or not. Furthermore, they should find ways to make the most of this tax provision and save more on their annual income from the tax forefront.