Presumptive Income- Section 44ADA Income Tax Act

Introduction

Presumptive Taxation was introduced in 2016 to be applicable from the Financial Year 2016-17. This scheme was introduced to give relief to professionals from maintaining books of accounts and getting them audited which is a headache for them. Further, the Presumptive Taxation scheme was incorporated under Sections 44AD, 44ADA, and 44AE of the Income Tax Act, 1961.

It means that the law will presume certain receipts to be income irrespective of the actual income or expenses. So, in this article, we will discuss Section 44ADA of the Income Tax Act, 1961 which talks about presumptive tax for certain professions.

Eligibility for Presumptive Income under Section 44ADA

The following conditions are required to be satisfied for availing of the benefits of Section 44ADA:

1. Assessee is a Resident Individual or Partnership Firm (but not Limited Liability Partnership – LLPs)
2. Furthermore, the assessee is Engaged in Profession specified under Section 44AA(1)

• The gross receipt must be lower than Rs. 50 lakhs in the Previous Year

Then, in the case where the conditions are satisfied, whichever of the two is higher:

1. 50% of the gross receipt in the previous year, or
2. Sum higher than Rs. 50 lakhs earned by the assessee

It is to be deemed as the income from profit and gains. Further, it will be charged under the head of ‘Profits and gains from business and profession’.

BUDGET 2023 UPDATE: 

Where the amount received in cash in the previous year doesn’t exceed 5% of the gross receipts of the previous year, then the threshold limit will be Rs. 75 lakhs.

 

What is the meaning of the term “Profession” as per Section 44ADA(1) of the Income Tax Act, 1961?

In essence, the term ‘Profession’ includes:

1. Legal Profession
2. Medical Profession
3. Engineering Profession
4. Architectural Profession
5. Profession of accountancy
6. Technical consultancy
7. Interior decoration
8. Any other profession notified by CBDT (Note: Notification given to authorized representative, film artist, company secretary, and profession of information technology)

Effects of Presumptive Income under Section 44ADA on Professionals

1. Deductions: No deductions under Sections 30 to 38 shall be given as these deductions will be deemed to have given effect.
2. Written Down Value of asset: The Written Down Value of the asset shall be deemed to have been claimed and deduction is actually allowed for depreciation for each of the relevant assessment years.
3. Profit is below 50% of Gross Receipt: Where the profit is below 50% of  the gross receipts, the assessee has to:

a. Maintain book of accounts and

b. Get them audited

c. Furnish an audit report (Section 44AB)

 

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Advance Payment of Tax for the purpose of Section 44ADA

To avail of the benefits of Section 44ADA, there is a requirement for advance payment of tax by 15^th March of every Financial Year.

But, if the advance tax is not paid before the due date, then interest under Section 234B and Section 234C is levied.

ITR Forms are required under Section 44ADA

A taxpayer who has opted for presumptive taxation under Section 44AD, 44ADA, or 44AE, is required to file Form ITR-4. Additionally, Form ITR-3 is to be filed if there is income from capital gains along with Section 44AD.

 

Benefits of availing Presumptive Taxation under Section 44ADA

The advantages of availing of presumptive tax are:

1. Reduced Compliance: It reduces compliance for professionals. This is because the books of accounts are not required to be maintained and are not to be audited.
2. Reduction in Tax Burden: It gives a flat 50% deduction as expenses from gross receipts. If the actual expenses are less than 50%, then the tax burden of the professional will be reduced a lot.

 

Illustration: 

To illustrate with an example:

1. A is a legal practitioner and his gross receipt for the financial year 2021-22 is Rs. 40,00,000. Now, if he chooses the presumptive taxation scheme under Section 44ADA, then the income on which he will be liable to pay tax is Rs. 40,00,000 – 50% of Rs. 40,00,000 = Rs. 20,00,000. No further deductions under Sections 30 to 38 are allowed. Thus, he will be liable to pay tax on Rs 20,00,000.
2. Suppose the expenses are Rs 25,00,000. Then, the income will be Rs. 15,00,000. Then, he has the option of not choosing the scheme, but for that, he will be required to maintain books of accounts and get them audited, if his total income crosses the basic exemption limit.

Conclusion

Section 44ADA of the Income Tax Act offers a simple yet efficient tax scheme for professionals with gross receipts of less than Rs 50 lakhs. Additionally, it reduces the cost of compliance with maintaining books of accounts and getting them audited. Moreover, it promotes the ease of doing business. However, Professionals who felt that their real income is less than the presumptive income can choose not to opt for the scheme, and if their income crosses the basic exemption limit, then they are required to maintain their books of accounts and get them audited.

 

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Presumptive Income- Section 44ADA Income Tax Act