Section 44ADA of the Income Tax Act

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

Section 44ADA deals with presumptive taxation for professionals that have to be taken into consideration for generated earnings and profits. However, it is important to note that only income that is generated via specific occupations that are mentioned u/s 44A(1) qualify for this presumptive tax regime.

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.

In case the income that is generated is less than 50% of the value of the receipts, then he/she will be asked to maintain account books. He/she will also have to get it audited. 

It also has to be noted that if the individual gets income from foreign-based clients, then he/she has to pay tax for it.

The objectives of  Section 44ADA are as follows -

• To make the tax system easy for small 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

The following assessees are eligible: 

• 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 an editor, actor, producer, movie director, dance director, art director, music director, singer, cameraman, lyricist, screenplay writer, costume designer and dialogue writer.

• Any authorised representative meaning an individual who represents another individual in exchange of 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.

The income of professionals covered u/s 44ADA is taken to be 50% of the total gross income 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 the 50% of the gross total receipt, if they want to do so.

Given below are some of the benefits that professionals can enjoy by opting for the presumptive taxation under Section 44ADA of the Income Tax Act:

• Reduced tax liability: Individuals can declare 50% of their net income as profit and the rest as expense in order to save money on tax as they have comparatively less expenses to declare. There is one condition though. It is that the gross income for the particular fiscal year should be lesser than Rs.50 lakhs. In case the total income exceeds this, then these professionals cannot enjoy the benefits of Section 44ADA.

• It helps you save money: Tax consultants usually charge a hefty amount to file tax returns for self-employed individuals because of the difficult filing requirements that are involved. Whereas, under Section 44ADA, individuals can file their returns by themselves because of the simple income tax returns form requirement. This also helps self-employed individuals save a lot of money.

• It makes the tax filing process easier: The biggest reason as to why professionals choose the presumptive tax regime under this section is because the tax form is very simple and short when compared to the complex income tax returns form under other sections of the IT Act.

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.

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

• You have to take into account your actual expense. Financial experts warn individuals with low net profit ratio to stay away from 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.