The benefits of presumptive taxation were available only to businesses up to FY 2016-17. The Government introduced Section 44ADA of the Income Tax Act, 1961 with effect from Financial Year (FY) 2017-18. This section was introduced for self-employed professionals, to reduce the level of compliances required by them and take advantage of presumptive taxation.
In this article, we will discuss the following topics:
A professional, who is a resident of India, may declare his/her professional income at 50% of the total gross receipts during the year or a higher sum as the case may be. The professional (assessee) is not expected to maintain any books of accounts or get his/her books of accounts audited under section 44AB of the Income Tax Act, 1961. Moreover, the assessee is not allowed to claim any expenses if the benefits under section 44ADA are availed.
In case the assessee has any asset which is used to earn the professional income then, the written down value of the asset will be calculated as if the professional was claiming depreciation under the provisions of the Income Tax Act for each year of use of the asset.
If the net profit is less than 50% of the ‘Total Gross Receipts’, then the assessee has the option of declaring their income at 50% of Total Gross Receipts u/s 44ADA or declaring the actual income by getting the books of accounts audited.
The professionals covered under section 44ADA are defined under section 44AA of the Income Tax Act, 1961. The benefit of this section is only available for those specified professionals whose annual gross receipts are less than INR 50 lakh. The professional services covered here are:
- Technical consultancy
- Interior Decoration
- Any other profession as notified by the Central Board of Direct Taxes
The benefits of section 44ADA can be availed by an Individual, HUF or a Partnership Firm (but not an LLP).
Here, income computed is-
- 50% of ‘Total Gross Receipts’ or
- Actual profit earned by the assessee
Whichever is higher.
A minimum of 50% of Total Gross Receipts is required to be declared as income by the assessee.
The income declared under section 44ADA shall be shown under the head “Income from Business/Profession” in the Income Tax Return (ITR).
Example: X is a resident aged 30 years and a self-employed lawyer. X’s total gross receipts are INR 25 Lakhs, and expenses related to the profession are INR 5 Lakhs. During the year, X has deposited INR 1.5 Lakhs in PPF.
|Particulars||Normal Provisions (INR)||Presumption Tax Provisions u/s 44ADA (INR)|
|Total gross receipts||25,00,000||25,00,000|
|Less: Expenses||5,00,000||12,50,000 (50%)|
|Gross Total Income||20,00,000||12,50,000|
|Deductions under Chapter VI-A||1,50,000||1,50,000|
|Total Taxable Income||18,50,000||11,00,000|
As seen from the above table, there is a significant reduction in tax liability when income is declared under presumptive tax provisions of section 44ADA of the Income Tax Act, 1961.
Declaring income under presumption taxation helps:
- To get the advantages of presumptive taxation for professionals along with small business who were the only benefactors.
- To simplify tax compliance for small professionals with a simpler and straightforward ITR 4
Furthermore, there is:
- No requirement of maintaining books of accounts
- No requirement of getting books of accounts audited
- Reduced tax liability as compared to the Normal Provisions (as seen in the above example).
- Typically, an assessee has to pay Advance tax in four instalments during the year if the tax payable exceeds INR 10,000. However, when income is declared under the presumptive basis, the assessee can deposit the total advance tax before 15 March of the financial year. If advance tax is not deposited, then the assessee would be liable to pay interest under section 234B of the Income Tax Act, 1961.
- The assessee must specify the “Business Code” by selecting the right option in the drop-down button in ITR-4.
- A partnership firm cannot claim expenses for interest on capital and remuneration paid to the partners when income is declared under section 44ADA.
- An assessee can freely opt-in and opt-out of presumptive taxation under section 44ADA each financial year. There is no five-year restriction, unlike section 44AD.
|Financial Year||Section 44AD||Section 44ADA|
|2019-20||Restriction from opting-in||Opt-In|
|2020-21||Restriction from opting-in||Opt-Out|
|2021-22||Restriction from opting-in||Opt-In|
|2022-23||Restriction from opting-in||Opt-Out|
|2023-24||Restriction from opting-in||Opt-In|