Section 44ADA Of Income Tax Act – Presumptive Tax Scheme

Union Budget 2021 Update: Earlier Section 44ADA of income tax act was applicable to every assessee who is a resident of India. With the Budget 2021 announcement, the presumptive taxation scheme under sec 44ADA will be applicable to an assessee who is a resident of India. It applies only to an individual taxpayer,  Hindu Undivided Family HUFs, and Partnership Firm excluding Limited Liability Partnership LLP.

Budget 2021 also announced an increase in the limit for tax audit for persons who are undertaking 95% of their transactions digitally from Rs 5 crore to Rs 10 crore under section 44AB. 

Section 44ADA of income tax act was introduced from the financial year 2016-17.  It was introduced for taxpayers carrying on a profession with the intent to provide them a simple taxation service. It provides a simple taxation scheme for taxpayers with income or losses arising from eligible professions. 

Section 44ADA Presumptive Taxation For Professional Individual

Sec 44ADA aims to provide a simplified taxation scheme to professional taxpayers with gross receipts of less than Rs 75 lakhs in a financial year. This limit has been extended from Rs 50 lakhs to Rs 75 lakhs. Furthermore, the cash receipts should not be more than 5%. The benefit of the scheme is that it provides simple taxation along with a reduction in the burden of compliances. It provides a taxpayer with ease of doing business as they are not required to maintain books of accounts. 

Eligibility For Deduction Under Section 44ADA of Income Tax Act

An assessee who is a resident of India can opt for the presumptive income under section 44ADA. The following assessees are eligible for the scheme:

1. Individual taxpayer
2. Hindu Undivided Family HUFs
3. Partnership Firm excluding Limited Liability Partnership LLP

Professionals Eligible For Deduction Under Section 44ADA of Income Tax Act

Every person who is carrying on any of the following professions:

1. Legal
2. Medical
3. Engineering
4. architectural profession
5. profession of accountancy
6. technical consultancy
7. interior decoration
8. Other professions. Movie artists including a producer, movie director, music director, art director, dance director. Others such as actor/ actress, editor, cameraman, singer, lyricist, story writer, screenplay or dialogue writer, and costume designers.
9. Authorized representative. An individual who represents another person in exchange for a fee before a tribunal or any authority constituted under any law. It does not include an employee of the person being represented. 
10. any other profession as is notified by the Board in the Official Gazette

Conditions To Claim Deduction Under Section 44ADA Of Income Tax Act

The following are the conditions under which an assessee can claim a deduction under sec 44ADA:

1. The assessee is a resident of India
2. The assessee is an individual taxpayer, HUF, or a partnership firm excluding LLP
3. Profession being carried on is prescribed under section 44AA of income tax act
4. An assessee whose total gross receipts do not exceed seventy lakh rupees in a financial year

Computation of Presumptive Income For Professionals

Under section 44ADA of the income tax act, the higher of the following is offered to tax:

1. 50% of total gross receipts in a financial year
2. Income offered by the assessee from the profession

Let us take an example and understand how the presumptive income under section 44ADA is calculated along with tax under a normal scenario.

Case-1 Total Expense is less than 50% of gross receipts

Mr. Arun earns gross revenue of Rs 20 lakh in the financial year 2019-20. His total expenditure amounts to Rs 7 lakh. These expenses are related to his profession and include expenses like conveyance, cost of services, electricity, rent, stationery expenses. 

ParticularsFY 2019-20	Under Normal Provisions	Under Presumptive Scheme
Gross Receipts	Rs 20,00,000	Rs 20,00,000
Less: Expenses	Rs 7,00,000	Rs 10,00,000
Taxable Income Chargeable To Tax	Rs 13,00,000	Rs 10,00,000

Here, since the expense in the financial year is less than 50% of the gross receipts is will better to opt for the scheme.

Case-1 Total Expense is more than 50% of gross receipts

Mr. Arun earns gross revenue of Rs 30 lakh in the financial year 2019-20. His total expenditure amounts to Rs 17 lakh. These expenses are related to his profession and include expenses like conveyance, cost of services, electricity, rent, stationery expenses. 

ParticularsFY 2019-20	Under Normal Provisions	Under Presumptive Scheme
Gross Receipts	Rs 30,00,000	Rs 30,00,000
Less: Expenses	Rs 17,00,000	Rs 15,00,000
Taxable Income Chargeable To Tax	Rs 13,00,000	Rs 15,00,000

Here, since the expense in the financial year is more than 50% of the gross receipts is will better to opt for the scheme.

Since 50% of the gross receipts is straight away put as expense allowed in the financial year every assessee must plan his/ her taxes before opting for the scheme.

Maintenance Of Books Of Accounts and Tax Audit

An assessee opting for a presumptive income under section 44ADA will be exempt from the following:

1. Maintaining the books of accounts under section 44AA
2. Tax audit of books of accounts under section 44AB

However, if an assessee fulfills the following conditions then he/ she will be under the purview. Hence he/ she will be required to maintain books of accounts along with compliance of getting the books of accounts audited by a Chartered Accountant.

1. an assessee claims that his/ her profits and gains from the profession are lower than 50% of the gross receipts
2. An assessee whose total income exceeds the maximum amount which is not chargeable to income-tax. The maximum amount which is not chargeable to income-tax is the basic slab exemption. For example- For a taxpayer, not being a senior citizen, the basic slab exemption is Rs 2.5 lakh

Benefits Of Opting Presumptive Scheme Under Section 44ADA 

The following are the benefits or the reason why many professional taxpayers opt for presumptive taxation scheme:

1. Taxpayers opting for presumptive tax scheme are not required to maintain books of accounts under section 44AA. Maintenance of books of accounts comes with a cost and hassle. The cost of paying to another professional to help maintain books and hassle in case you do it yourself
2. No tax audit compliance under section 44AB before return filing. Compliance with section 44AB to get the books of accounts audited from a chartered accountant is again not a cost-effective affair. 
3. The income tax return form is quite straight forward. The return filing is simple for a self-employed profession opting for section 44ADA. Since the form is simple and it is easy to file returns the taxpayer can file all by himself saving me the hassle of a tax consultant and professional fee. 
4. Under the presumptive tax scheme, you straight away lower your income chargeable to tax by 50%. This lowers your tax liability for a financial year. 
5. Lastly to establish a parity between small businessmen who enjoy presumptive tax scheme u/s section 44AD and small professionals u/s section 44ADA

Implications Of Opting Presumptive Scheme Under Section 44ADA For Professionals

Out of the total gross receipts only 50% of chargeable to income tax as taxable income. The other 50% of gross receipts are deemed as business expenses incurred by the taxpayer. The business expenses include the cost of service or consumables, electricity, rent, stationery expenses, depreciation of assets, and so on.

Within this 50% of gross receipts, it is assumed that any deduction allowable under the provisions of sections 30 to 38 are already allowed. Further, no other deduction under those sections shall be allowed at the time of return filing.

Even the depreciation of assets is also deemed to have been provided under the balance of 50% of gross receipts. The written down value of any asset used for the purposes of profession shall be deemed to have been calculated as if the assessee had claimed and had been actually allowed the deduction in respect of the depreciation for each of the relevant assessment years. 

Hence, the decision to whether opt for the scheme or not must be made very carefully. Hence, a taxpayer must first estimate his receipts and expenses for better tax planning. 

Under the tax scheme for professionals, every taxpayer must pay the advance tax on taxable income by 15th March of the financial year. The taxpayer must pay the entire amount of advance tax before the due date. Further, non-compliance with advance tax provisions will lead to interest and penalties.

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