The tax provisions under Income Tax Act,1961 have many provisions and intricate details that need to be considered while filing tax returns. It often becomes quite cumbersome for small taxpayers to understand the tax laws and file correct tax returns. In order to provide relief to such taxpayers, the Income Tax Act also has presumptive tax provisions. Under these provisions, tax is calculated at a presumptive rate and not at the actual applicable rate of tax.
These presumptive tax rates are applicable for businesses as well as professionals. Given below are few details regarding the presumptive taxation under section 44 ADA of the Income Tax Act.
Budget 2023 revised presumptive taxation limits under Sec 44ADA
In Budget 2023, the government announced an increase in the tax limits for certain taxpayers like small businesses and professionals. The new limits are Rs.3 crores for MSMEs and Rs.75 lakhs for professionals if they have received less than 5% of their total income in cash.
However, if more than 5% of their annual receipts are in cash, then the old limits of Rs 2 crs and Rs 50 lakhs will apply.
What is Section 44ADA of Income Tax Act?
Section 44ADA was launched in the financial year 2016-17. Earlier the benefit of presumptive taxation was available only for small businesses. After the amendment in the Finance Act of 2016, the benefit of presumptive taxation was extended to the specified professionals. Under this section, professionals get the benefit of reduced compliance and profits presumed to be at 50% of the gross receipts.
Scope and objectives of section 44ADA
Section 44ADA was introduced with a fixed set of objectives. These objectives are mentioned below.
- Simplification of tax procedure for self-employed professionals
- Reduced tax compliance and tax liability
- Increase the ease of doing business for self professionals
- To bring parity between small professionals and small businesses.
This means that the assessee does not have to provide details of their expenses incurred in the business. They can simply pay tax at 50% of their gross receipts making the balance 50% as allowable expenses under the business and profession without the need to refer to other provisions of the Act.
Eligible professionals under section 44ADA
Section 44ADA is applicable for resident Indians who are engaged in the specified professions. The underlying condition for the applicability of provisions under this section is that the gross receipts received from the profession is less than Rs. 50,00,000 in any financial year. The provisions of section 44ADA have specified the list of persons that are eligible to avail benefits of this section. Given below is the list of such persons,
- Engineering or architectural
- Technical consultancy
- Interior decoration
- Any other profession as notified by CBDT
- This includes persons associated with the movie industry like actors, producers, directors, editors, music directors, art directors, cameramen, singers, lyricists, etc.
- Authorized representatives of the person are the person that is charged with representing a person in an official capacity under any law for monetary consideration. It is important to note that such representation does not include employees of the organization.
- Any other professional noticed by CBDT in this regard.
Amendment in section 44ADA of the Income Tax Act
The Finance Act of 2021 has amended the provisions of section 44ADA to specifically notify the eligible persons that can get the benefit of this section. Prior to this amendment, the provisions of the section were applicable to all the resident individuals. After the proposed amendment in Finance Act 2021, the provisions of this section will be applicable to the following entities,
- Resident individuals
- Partnership Firm (Except LLP)
Related points of sec 44ADA
Section 44ADA provides the benefit of presumptive taxation that eliminates the need to adhere to the detailed provisions of the Act that are applicable to the profits and gains from the other businesses and professions. However, there are other points to be considered while computing the taxation as per section 44ADA and filing the same with the Department. Some of these considerations are highlighted below.
- Advance tax
Professionals opting for presumptive taxation under section 44ADA are required to pay their advance tax on or before the 15th of March of the previous year. If the assessee does not comply with this provision, they are liable to pay interest on the amount due as per section 234C.
- Maintenance of books
A professional option for presumptive taxation under section 44ADA is not liable to maintain books of accounts as per section 44AA. They are also not required to have their accounts audited as per section 44AB. This provision shall not apply if the professional has declared that their income is offered to be taxed at lower than 50% of the gross receipts.
- Treatment depreciable assets
The treatment of depreciable assets in case of presumptive taxation under section 44ADA is the same as in the normal course of business. Taxpayers are not allowed to claim depreciation separately under this section. It will be included in the adhoc 50% deduction allowed on gross receipts. However, the WDV depreciable assets will be computed as if depreciation has been duly allowed on such assets as per section 32 of the Act.
- Treatment of taxable income when section 44ADA is not opted
When the assessee claims that their income and gains are lower than 50% as per the presumptive taxation of section 44ADA, they can choose to not opt for this scheme. Under such circumstances, the provisions of section 44AA and section 44AB will be applicable to such assessee. This means they will have to maintain proper books of accounts and get them audited by a Chartered Accountant.
Benefits of section 44ADA
Some of the top benefits to be availed from this section are:
- Reduced compliance
The taxpayer is also not required to keep detailed books of accounts as per section 44AA and get them audited as per section 44AB. This reduces the burden of the taxpayers and allows them to focus solely on their profession.
- Ease of tax filing
The tax filing process for presumptive taxation becomes quite simple as against a regular tax filing. This is on account of reduced compliance procedures to be followed and the documentation needed is negligible.
- Reduced tax liability
Professionals do not usually have higher capital expenditure or high regular expenses to meet their professional requirements. Despite this, section 44ADA provides the option to tax only 50% of their gross receipts which can substantially reduce their tax burden.
- Option to move in and out of the scheme without the restriction of 5 years
Professionals can opt in and out of this scheme at any point without any lock-in or restrictions of 5 years unlike provisions of section 44AD applicable on business.
Things to consider before opting for Section 44ADA
Here are some of the aspects to bear in mind before using provisions of Section 44ADA:
- Actual expenditure: Professionals with a low net profit ratio should avoid this tax provision.
- No deduction for remuneration paid to partners: There is no provision in the tax act that allows professionals to deduct remuneration paid to partners from presumptive income.
- Partner’s option: Even if a professional firm does not adopt this tax provision, its partners can still opt for Section 44ADA in terms of interest or salary received for the same firm.
- Option to opt-out: Professionals who had previously chosen this tax provision can opt out of it at any time, unlike some specific types of taxpayers.
After carefully weighing all these factors, one can decide whether to opt for and make the most of Section 44ADA for tax-saving purposes.
There are many sections pertaining to presumptive taxation under the Income Tax Act. These sections provide the benefit of reduced tax liability and reduced compliance to small businesses and professionals thereby encouraging them to pay tax at a reduced rate. This eventually helps the Department increase the overall tax collections while taxpayers get the multiple benefits of presumptive taxation.
1. What is the treatment of gross receipts under section 44ADA?
Under section 44ADA, 50% of the gross receipts of the professional are taxed allowing them an ad-hoc deduction of 50%.
2. Can an NRI opt for this taxation under section 44ADA?
NRIs cannot opt for taxation under section 44ADA.
3. Who is eligible for provisions of section 44ADA?
Eligible professionals who have gross receipts less than Rs. 50,00,000 in the financial year are eligible to opt for provisions of section 44ADA.
4. Is section 44ADA mandatory?
. No. Section 44ADA is an optional section. Taxpayers can choose to opt for the provisions of this section and opt-out at any point.