Section 44ADA: Presumptive Taxation for Professionals and Small Businesses.

Section 44ADA was introduced after Section 44AD of the Income Tax Act of 1961 with effect from the FY 2016-2017. This section has special provisions for calculating the gains and profits of professionals who are mentioned in Section 44AA(1) on a presumptive basis. The total receipts from these professions should not go beyond ₹50 Lakhs in a fiscal year.

Objectives of the Section 44ADA of the Income Tax Act

This section was included in the Income Tax Act as a portion of the presumptive tax regime and does not demand individuals to maintain account books. The profit generated can also be calculated as a part of the total sales made in a financial year.

Mostly salaried employees will choose to freelance to get some extra income. In such a situation, the earnings from freelancing will be added to the salary income to find out the gross income earned in a particular financial year. It is important to note that the total income will be applicable for taxation according to the tax slab rate.

The rate of presumptive tax under Section 44ADA:

The income of professionals covered u/s 44ADA is taken to be 50% of the total gross income of up to ₹50 Lakhs from the profession for that particular fiscal year
This figure was worked out based on the assumption that these individuals usually have lower expenses when compared to a self-employed individual
Under this section, professionals who are eligible can also declare an income higher than 50% of the gross total receipt, if they want to do so
The eligible individuals need to maintain and provide audited books of accounts or documents

The objectives of Section 44ADA are as follows:

To make the tax system easy to comply with for self-employed individuals
To reduce the burden of tax compliance for small self-employed individuals
To make sure that there is equality between self-employed individuals covered u/s 44AD and professionals who were not covered u/s 44AD of the IT Act
To make the process of doing business easy for small self-employed individuals
To minimise disputes regarding taxation that may arise between these individuals and the tax authorities

Eligible Entities and Professions

The following entities are eligible to avail of the provisions under Section 44ADA of the Income Tax Act:

Individuals
Partnership firms (LLPs are not eligible)
Hindu Undivided Families (HUFs)

Under Section 44ADA, the professions eligible for presumptive taxation are:

Technical consulting
Interior decorations
Engineering
Legal
Accounting
Medical
Architecture
Other professions mentioned by the CBDT

Other professionals include:

Movie artists such as editors, actors, producers, movie directors, dance directors, art directors, music directors, singers, cameramen, lyricists, screenplay writers, costume designers, and dialogue writers
Any authorised representative, meaning an individual who represents another individual in exchange for a fee before any authority or tribunal constituted under the law. It does not include a salaried employee of the individual represented or an individual who has an accountancy career
Other notified professionals

Things to Remember When Opting for Section 44ADA

It is very important to take these points into consideration before you choose this tax provision:

You have to take into account your actual expenses. Financial experts warn individuals with low net profit ratios to avoid this tax regime.
There are no provisions under this section that allows you to deduct any remuneration that is paid to partners from any presumptive income.
Even though a professional company does not choose this tax regime, its partners can still choose this section in terms of salary or interest received from the same company.
Contrary to specific taxpayers, individuals who had earlier opted for this tax regime can choose to opt out of it anytime.

Are doctors eligible for Section 44ADA?

Yes, doctors can use Section 44ADA to calculate their taxable income at 50% of their gross receipts, applicable for self-employed doctors with gross receipts up to ₹50 Lakh per financial year.

Can a salaried employee use Section 44ADA?

No, Section 44ADA is only for self-employed professionals with gross receipts up to ₹50 Lakh, such as doctors, lawyers, and freelancers. It doesn’t apply to salaried employees.

Which professions are covered under Section 44ADA?

Section 44ADA covers professionals in legal, medical, architectural, engineering, accountancy, technical consultancy, interior decoration, and other similar professions.

What is presumptive income in Income Tax?

Presumptive income is the percentage of gross receipts considered as profit for a financial year. Instead of maintaining accounts, it enables you to declare a specific percentage of receipts as the expenditure and the remaining as revenue.

How does presumptive taxation work?

Under Section 44ADA, 50% of the gross receipts are deemed taxable income. Once you have arrived at your profits, you can gauge which tax slab you fall under and calculate it accordingly.

Is presumptive taxation beneficial?

Presumptive taxation tries to lighten the burden of tax processing and filing. It also reduces your liabilities even if your business expenses are low.

Who is eligible for presumptive taxation?

The eligible 44ADA professions include technical consulting, interior designing, engineering, legal, accounting, medical, architecture and other professions mentioned by the CBDT.