The presumptive taxation scheme was introduced in FY 1995-96 under Section 44AD of the IT Act. The provision eliminated the need for eligible small businesses to maintain regular books of account and declare income at a prescribed rate.

A similar presumptive taxation scheme was introduced for small self-employed professionals in FY 2016-17 under Section 44ADA. Let us have a detailed look at what this presumptive taxation scheme is and who can benefit from it-

What is Section 44ADA?

Section 44ADA offers a presumptive taxation system for the gains and profits generated in professions covered in Section 44AA(1) of the IT Act. Under the scheme, profits generated by eligible professionals are presumed at only 50% of their gross receipts.

For instance, Mr Rahul, a freelancing architect, has total receipts of Rs. 20 lakhs for FY 2019-20. The annual expense towards conveyance, travelling, rent, telephone, etc. is Rs. 8 lakhs. Let us now have a look at his net profits as per the normal provisions and under Section 44ADA-

Under Normal Provisions Under Presumptive Scheme
Gross Receipts Rs. 20,00,000 Rs. 20,00,000             
Expense Rs. 8,00,000   Rs. 10,00,000 (presumptive expense at 50%)
Net Profit Rs. 12,00,000 Rs. 10,00,000
As can be seen above, under normal provisions, Mr Rahul would be required to pay income tax on the net profit of Rs. 12 lakhs. The same under the presumptive scheme would fall to Rs. 10 lakhs.

What are the Other Benefits Under Section 44ADA?

Apart from presumptive taxation at 50%, eligible professionals are-
  • Not required to main regular books of account as per Section 44AA
  • Not required to get their accounts audited under Section 44AB

What are the Professions Eligible Under Section 44ADA?

Self-employed professionals from the following professions can take advantage of the presumptive taxation scheme-
  • Accounting
  • Architecture
  • Engineer
  • Interior decorations
  • Legal
  • Medical
  • Other professions specified by the CBDT (Central Board of Direct Taxes)

What are the Exclusions Under Section 44ADA?

Eligible professionals whose annual income is not above Rs. 50 lakhs can take advantage of this presumptive taxation scheme. Individuals, HUFs (Hindu Undivided Families), and Partnerships are eligible for this scheme. However, LLPs (Limited Liability Partnerships) are excluded.

Also, if the income of an eligible professional is less than 50% of their gross receipts, they are required to get their accounts audited.

Easier Taxation and Reduced Tax Burden with Section 44ADA

While it was only small businesses that could benefit from the presumptive taxation system, even small professionals can now benefit from it under Section 44ADA.
Eligible small professionals should take advantage of this presumptive scheme as it not only makes taxation easier but also helps reduce the income tax liability.

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DISCLAIMER

The information contained herein is generic in nature and is meant for educational purposes only. Nothing here is to be construed as an investment or financial or taxation advice nor to be considered as an invitation or solicitation or advertisement for any financial product. Readers are advised to exercise discretion and should seek independent professional advice prior to making any investment decision in relation to any financial product. Aditya Birla Capital Group is not liable for any decision arising out of the use of this information.



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