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.
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.
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
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
Section 44ADA of the Income Tax Act provides a multitude of benefits to small professionals. Let's understand them in brief:
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.
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.
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.
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.
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.
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.
Anyone earning income as following professionals:
Legal services
Medical
Architectural profession
Technical consultants
Engineers
Interior designers
Accountants
Company secretaries
Film artists etc.
Presumptive taxation tries to lighten the burden of tax processing and filing. It also reduces your liabilities even if your business expenses are low.