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Section 44ADA | Finserv MARKETS

What is Section 44ADA and What are its objectives?

27 Oct 2021
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We all know that taxes are a source of income for the government. This revenue is utilised to develop infrastructure, improve healthcare services, promote education, boost agriculture, and more. Thus, the Income Tax Act was introduced to administer taxation processes. Every section of this act addresses a specific purpose. And Section 44ADA of the Income Tax Act focuses on presumptive taxation for small professionals.

In this article, we’ll explore the Section 44ADA of the Income Tax Act applicability, eligibility, and benefits.

What is Section 44ADA of the Income Tax Act?

Section 44ADA offers details about presumption taxation for small professionals. It was introduced during the FY 2016-2017 to calculate their profits and gains in certain situations. However, if you want to enjoy the benefits of the presumptive tax scheme, ensure that your profession is mentioned in Section 44AA(1).

Section 44ADA of the Income Tax Act was included to excuse small professionals from maintaining books of accounts. Earlier, this scheme was only applicable to small businesses. It simplifies tax for professionals with a gross income of less than ₹50 lakh per year. In fact, Section 44ADA enables them to declare their taxable income/profit at 50% of their gross receipts.

Objectives of Section 44ADA

Let’s understand the objective behind introducing Section 44ADA under the Presumptive Taxation Scheme.

  • To simplify the taxation system

  • To reduce the burden on tax compliance

  • To ensure small professionals can do business with ease

  • To establish parity between small businessmen and professionals

Eligible Professions Under Section 44ADA

The following professions are eligible for Section 44ADA of the Income Tax Act applicability.

  • Legal services

  • Medical

  • Architectural profession

  • Technical consultants

  • Engineers

  • Interior designers

  • Accountants

  • Company secretaries

  • Film artists

Benefits of Section 44ADA

Section 44ADA of the Income Tax Act provides a multitude of benefits to small professionals. Let's understand them in brief:

Seamless Income Tax Return Filing Process

Filing tax returns under Section 44ADA is easy, time-efficient, and straightforward as compared to other ITR forms. Since the objective of this section is to simplify processes, it reduces the probability of error-prone Income Tax Return filing.

Reduced Tax Liability

As a professional, you might not have enough expenses to declare. Section 44ADA enables you to declare 50% of the earning as profit and the remaining as expenses.

Scope of Saving Money

Since Section 44ADA makes the taxation process easy, you can file ITR on your own. It eliminates the need for seeking help from a tax consultant.

Implications of Choosing Section 44ADA

As per Section 44ADA, only half of the receipts is deemed taxable income, whereas the other half is considered as business expenditure. These expenses can include the following:

  • Consumables

  • The cost of services sought from another professional

  • Daily expenses

  • Books and stationery

  • Telephone charges

  • Depreciation of assets like a laptop, vehicle, printer, etc.

  • Any other profession-related expense

However, Section 44ADA assumes that the exemptions mentioned in Sections 30 to 38 are already included in the 50% business expenditure. Hence, you cannot avail any additional exemption while filing ITR.

FAQs

  • ✔️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.

  • ✔️Who is eligible for presumptive taxation?

    Anyone earning income as following professionals:

    • Legal services

    • Medical

    • Architectural profession

    • Technical consultants

    • Engineers

    • Interior designers

    • Accountants

    • Company secretaries

    • Film artists etc.

  • ✔️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.