Section 44ADA Of The Income Tax Act : Benefits & Purpose Of Presumptive Taxation Scheme

Income Tax

Income Tax Act, 1961 urges professionals and business persons to maintain books of accounts. Along with that, they have to file income tax returns at the end of the current fiscal year and get their accounts audited. To simplify the process and decrease the burden of compliances, the Government introduced the Presumptive Taxation Scheme under Section 44ADA of the Income Tax Act. 

This scheme is available to professionals specified under this section who have gross receipts below Rs. 50 lakh in an FY. To know more about eligibility factors, benefits and implications of choosing a presumptive scheme under section 44ADA of ITA, keep on reading!

What is the Purpose of Section 44ADA of The Income Tax Act?

The Government of India inserted Section 44ADA into the Income Tax Act for the calculation of profits of specified persons. 

The main purposes are enumerated as follows:

• To reduce the burden of compliance and promote ease-of-doing business

• To extend the benefits of presumptive taxation to small professionals along with small businessmen

• To simplify the taxation system in the country

Also Read: A guide to taxation of Equity Linked Saving Scheme Funds

Who Is Eligible for Tax Exemption under Section 44ADA?

Apart from paying heed to the annual income, you should be aware of certain eligibility aspects related to this provision. To be eligible for the presumptive scheme, individuals need to be a resident of India. The Union Budget 2021 announced that Section 44ADA would be only applicable to the following taxpayers:

• Individuals belonging to a HUF or Hindu Undivided Family 
• An individual taxpayer
• Partnership firms other than limited Liability Partnership (LLP)

Apart from this, there are certain parameters related to the assessee’s profession mentioned in the norms of Section 44ADA of the Income Tax Act, 1961. Find the professions specified under this provision below:

• Engineering
• Legal
• Medical
• Interior decoration
• Architectural profession
• Accountancy related profession
• Technical consultancy
• Film artists, costume designers, movie directors, scriptwriters, cameramen, art directors, etc. 
• Professions that are mentioned in the Official Gazette of the Board
• Authorised representatives 

Now, if you fall into one of these categories mentioned above, there are certain advantages you can expect from going for the presumptive scheme under Section 44ADA of ITA. 

Also Read: Section 40A of the Income Tax Act: Tax Deductions For Companies & Firms

Illustration of Presumptive Income Offered under Section 44ADA 

The case study below illustrates the presumptive income offered under section 44ADA:

Suppose Anisha is an interior designer. Her receipts for the financial year 2019-2020 are Rs. 40 lakh and her annual expenses are Rs. 10 lakh.

The tables below will compare Anisha’s taxable income under normal provisions and presumptive tax scheme.

Normal Provisions:

Presumptive tax scheme:

As illustrated by the case study above, Anisha’s net profit under the presumptive scheme is lower than that calculated under normal provisions. Therefore, if Anisha calculates her income calculated as per the presumptive tax scheme, it will be beneficial for her. 

Benefits of Choosing Presumptive Scheme under section 44ADA

Here is a list of perks professionals will get by going for this particular taxation scheme:

• Your tax liability reduces significantly as 50% of the income is declared as profit and the remaining amount as expenses. 
• Under Section 44ADA of the Income Tax Act, the tax filing process becomes relatively hassle-free, and you can do it by yourself. This way, you can also avoid paying a tax consultant for this work and save money.
• Generally, to get the books of accounts audited, business professionals have to appoint a chartered accountant, which again becomes an expensive affair. However, under Section 44ADA, tax audit compliance is not necessary before filing ITR, making it simpler and more cost-effective for taxpayers. 

Now that you have a better understanding of all benefits associated with going for a presumptive taxation scheme, go through some of its implications stated below.

Also Read: Section 194H Of The Income Tax Act

When is it Necessary for an Assessee to Keep Records and Have Their Accounts Audited?

If the taxpayer fulfills the following parameters, he/she should keep records and have their accounts audited:

• In case the total income of the assessee exceeds the basic exemption

• If the taxpayer earns an income at a lower rate than 50% of the gross receipts 

Section 44ADA Exemptions

Given below are the details of the exemptions allowed under section 44ADA:

• One can calculate WDV (written down value) after the depreciation is deducted

• An individual can avail the deductions mentioned in Section 30 – 38, including allowances or unabsorbed depreciation 

Salaried Individuals’ Provision under Presumptive Tax Regime

Many times, a salaried individual chooses to earn extra from other sources like freelancing or tuitions. In such cases his/her salary is added to the extra earnings for arriving at the gross income accrued in the financial year. 

The individual is liable to pay tax on the total income according to the applicable income tax slab rate.

Important Factors One Must Consider before Opting for Section 44ADA

Enumerated below are the important factors that one needs to consider before opting for presumptive taxation:

• Section 44ADA does not allow eligible taxpayers to deduct the remuneration they pay to partners from presumptive income
• Partners in a firm can choose Section 44ADA for the salary or interest that they receive even if the firm does not follow this tax provision 
• Taxpayers who select this tax provision can discontinue at their will
• Availing this tax provision is advisable for people with a low net profit ratio

Implications of Choosing Presumptive Scheme under section 44ADA

Under this tax provision, 50% of the total gross receipts are usually termed as taxable income. The remaining 50% of gross receipts are regarded as different expenses related to the business, such as electricity costs, depreciation of assets, etc. 

Note that apart from deductions that are already allowed under Section 30 to 38 within this 50% of gross receipts, no other deductions will be available. Even when it comes to depreciable assets’ written down value (WDV), the evaluation will be again after the deduction of allowed depreciation.

Final Words 

Keep this information in mind before you opt for the presumptive scheme under Section 44ADA of the Income Tax Act. It is advisable to estimate your expenses and the receipts before you make such decisions, as that helps in better tax planning. Also, consult financial experts beforehand as they often ask to avoid this tax provision to businessmen having a low net profit ratio. 

FAQs on Section 44ADA Of The Income Tax Act 

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This article has been prepared on the basis of internal data, publicly available information and other sources believed to be reliable. The information contained in this article is for general purposes only and not a complete disclosure of every material fact. It should not be construed as investment advice to any party. The article does not warrant the completeness or accuracy of the information, and disclaims all liabilities, losses and damages arising out of the use of this information. Readers shall be fully liable/responsible for any decision taken on the basis of this article.