People engaged in business or professions are required to maintain regular books of accounts, which can be a time-consuming, costly, and tedious task. Also, they need to get the accounts audited. To give relief to small taxpayers from this, the Government introduced the presumptive taxation scheme. Let us understand the presumptive taxation scheme for professionals under Section 44ADA of the Income Tax Act.
What is the presumptive taxation scheme under Section 44ADA?
Under Section 44ADA of the Income Tax Act, the income of the professional is computed on a presumptive basis. In a financial year, 50% of the total gross receipts of the profession are taken as income for taxation purposes. However, the individual can declare income higher than 50%.
For example, Tina is a medical professional with an annual income of Rs. 25 lakhs. Her annual expenses are Rs. 5 lakhs, giving a net profit of Rs. 20 lakhs for taxation purposes under the normal taxation system. However, if she files her ITR under Section 44ADA, Rs. 12.5 lakhs (50% of total gross receipts) will be taken as income for taxation purposes. Thus, the presumptive taxation scheme can reduce the taxable income. It also simplifies taxation for small professionals.
In the above case, on the 50% taxable income of Rs. 12.5 lakhs, Tina can claim deductions under Chapter VI-A and reduce her taxable income further. The deductions that can be claimed under Chapter VI-A include Sections 80C to 80U. Some of the well-known deductions include:
Section 80C – Investments up to Rs. 1,50,000 in ELSS, PPF, EPF, NSC, SCSS, SSA, etc.
Section 80CCD – Contribution towards NPS
Section 80D – Health insurance premium paid for self, spouse and children, and separate deduction for health insurance premium paid parents
Section 80E – Interest on education loan
Section 80G – Donations
Section 80TTA – Interest on savings account(s)
Who can take advantage of the presumptive taxation scheme under Section 44ADA?
A professional with gross receipts of up to Rs. 50 lakhs in a financial year can take advantage of the presumptive taxation scheme and file ITR under Section 44ADA. The provisions of the presumptive taxation scheme under Section 44ADA apply to the following professions:
- Engineering or architectural
- Technical consultancy
- Interior decoration
- Any other profession, as notified by the Central Board of Direct Taxes (CBDT)
In Budget 2023, the upper limit of Rs. 50 lakhs for total gross receipts in a financial year has been increased to Rs. 75 lakhs. However, to avail of the higher limit, the aggregate cash amount received during the financial year should not exceed 5% of the total gross receipts.
What is the benefit of the presumptive taxation scheme under Section 44ADA?
The biggest benefit is that the professional can declare 50% of the annual gross receipts as taxable income. Also, the professional gets relief from the need to maintain books of accounts which can be costly, time-consuming and tedious. Also, there is no need to get the accounts audited. Thus, the presumptive taxation scheme reduces the compliance burden for small professionals and improves the ease of doing business.
There may be instances where the professional declares income at a rate lower than 50%, and the declared income amount is higher than the maximum amount, which is not chargeable to tax. In such cases, the professional has to keep and maintain the books of accounts. The individual needs to get the accounts audited and furnish an audit report.
Filing ITR under the presumptive taxation scheme (Section 44ADA)
While filing the ITR under the presumptive taxation scheme (Section 44ADA), the individual has to choose Form ITR-4. If the individual also has capital gains, they have to select Form ITR-3. You will find the Section 44ADA details under the head "Profits and gains of business or profession".
Should you file ITR under the presumptive taxation scheme?
Are you in a profession covered under the presumptive taxation scheme of Section 44ADA, and are your annual gross receipts within the specified limits? If yes, you may file your ITR under the presumptive taxation scheme and declare 50% income. Also, you will not need to maintain books of accounts or get them audited.
Gopal Gidwani is a freelance personal finance content writer with 15+ years of experience. He can be reached at LinkedIn.