Presumptive Taxation Scheme for Professionals Section 44ADA

Presumptive Taxation Scheme for Professionals Section 44ADA

Presumptive Taxation Scheme for Professionals Section 44ADA: A scheme for the presumptive taxation had been introduced under section 44ADA from the F.Y. F.Y. 2016-17.

Section 44ADA offers a simple method for taxation of small professionals. Section 44ADA provides a scheme of presumptive taxation of profits and gains that arise from professions and are mentioned under Section 44AA(1) of the Income Tax Act of the year 1961.

The advantages of section 44ADA can be availed only by those professionals specified whose annual gross receipts are under the amount of Rs 50 lakh.

Latest Update

The outcome of the Union Budget 2021:

The threshold limit for tax audit for businesses has been extended from Rs. 5 crores to 10 crores w.e.f. A.Y. 2021-22, when digital transactions are not less than 95% of the total transactions.

Purpose and Scope of Section 44ADA

Section 44ADA is a unique provision used for calculating the gains and profits of small professionals in particular circumstances.

Section 44ADA had been introduced for extending the scheme of the simplified presumptive taxation to the professionals specified. Formally, the presumptive scheme of the tax remained applicable only for small businesses.

The presumptive scheme of taxation has reduced the compliance burden on small professions and promotes ease of doing business. Under the theoretical system of taxation, profits are presumed at 50% of gross receipts.

Eligible Assesses for Section 44ADA

The following stated Indian assessees are eligible: Individual Hindu undivided families (HUFs) and Partnership firms (note that the limited liability partnerships are not eligible)

Individuals who are eligible for the section 44ADA

Professionals who have been mentioned under the Section 44AA of the Income Tax Act of the year 1961, whose complete gross receipts are less than the amount of Rs 50 lakh in a year, are the eligible inheritors.

Latest Update

The outcome of the Union Budget 2021:

The speculative taxation scheme under section 44ADA had been previously applied to all the resident professionals referred to in section 44AA. However, from now onwards, it applies only to the resident individuals, Hindu Undivided Family or a partnership firm.

Professionals Eligible Under Section 44ADA

Professionals who are engaged in the following stated professions are eligible:

  • Interior decorations
  • Engineering
  • Medical
  • Technical consulting
  • Accounting
  • Legal
  • Architecture
  • Other professionals, as mentioned below:
  • Movie artists include the producer, actor, editor, music director, art director, director, story writer, dance director, cameraman, singer, lyricist, screenplay or dialogue writer and costume designers.
  • Authorised representative implying an individual representing another individual for a fee prior to a tribunal or any authority that has been constituted under any law. It doesn’t include an employee of the individual so designated or an individual who is carrying on the accountancy profession.
  • Any other such notified professionals.

What is the Speculative Income Offered?

Higher of the following is offered as speculative income: 50% of the total receipts from the profession Income provided by the assesses of the profession.

Illustration

Ms. Aditi is a freelance interior decorator. Her total receipts for the financial year of 2018-19 is Rs 30 lakh. Her annual expenses were Rs 10 lakh towards conveyance, rent, telephone etc. Here, we can compare her taxable income under the standard provisions and speculative scheme as stated below:

Under Normal Provisions

  • Gross receipts are 30,00,000
  • Less: Expenses is 10,00,000
  • Net profit is 20,00,000

Under Presumptive Scheme

  • Gross receipts are 30,00,000
  • Less: 50% deemed expenses is 15,00,000
  • Net profit is 15,00,000

In the above scenario, the net profit under the presumptive scheme is lower than the standard provisions. Therefore, it is advantageous for Ms. Aditi to offer her income under the hypothetical taxation system under section 44ADA.

What Benefits Does an Assesses get When Following Section 44ADA?

By following the Section 44ADA, and assesses is going to get the stated benefits:

  • No need to maintain books required under Section 44AA
  • No requirement for having accounts audited under Section 44AB

Implications of Choosing Section 44ADA

All deductions for the business expenses are considered to have been allowed. Once the profits are taxed at 50 percent of the gross receipts, the balance of 50 percent is considered to be allowed towards all business expenses of the assesses.

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