Decoding Section 44ADA of Income Tax Act: Presumptive Tax for Professionals

Internal Decoding Section 44ADA of Income Tax Act: Presumptive Tax for Professionals Self employed professionals end up going through a lot of hoops to file their income tax returns. Of course, the government is aware of that fact, which is why provisions like 44ADA exist. Section 44ADA of the Income Tax Act aims to simplify the tax filing process for various self-employed professionals who earn under ₹75 lakhs per year (w.e.f. 01.04.2024, earlier limit was ₹50 lakh).

Section 44ADA is a presumptive tax scheme which allows professionals to pay a flat tax rate of 8% on 50% of their gross income. However, if a professional chooses to follow this scheme, they will no longer be able to claim deductions based on their actual expenses.

What is Section 44ADA?

Usually, professionals and small businesses need to maintain an account of all their income and expenditure for tax purposes. Self-employed professionals only need to pay taxes on their profits, which is calculated by subtracting their gross receipts by their expenses. However, this process of maintaining accounts and calculating profits can be tiresome and time consuming.

Section 44ADA greatly simplifies this process by just taxing 50% of the gross receipts. So, professionals need not bother with vigilant account keeping. Nor will they have to hoard all their business receipts as proof of expenses. Simply put, as a self-employed professional, only 50% of your annual income will be taxed at a rate of 8% if you choose to follow Section 44ADA.

A Simple Example of How Section 44ADA Works

Let’s take an example of a doctor who earns ₹30 lakhs in a year. Since this doctor runs their own clinic, they are a self-employed professional. Of course, not all the income earned by a professional can be taken in-hand. A part of said income will have to be subtracted as business expenses.

Business expenses can include anytime from salary for the receptionist to maintenance costs for medical tools. Let’s say this doctor has an annual business expense of ₹10 lakhs. By deducting the doctor’s income and expenses, their total taxable income will be ₹20 lakhs (₹30 lakhs - ₹10 Lakhs).

However, this doctor can opt to follow the taxation scheme offered under Section 44ADA. This will allow them to directly pay their taxes without having to maintain a pristine record of their receipts. Under Section 44ADA, only 50% of the doctor’s income will be taxable. Hence, their total taxable income will be ₹15 lakhs, which is ₹5 lakhs lower than before.

Who Can Avail of the Tax Scheme Under Section 44ADA

Self-employed professionals can file taxes under Section 44ADA. Below is a list of professions that can opt for this taxation scheme. Note that the list provided below is not comprehensive! If you’re self-employed but your profession is not mentioned below, consider contacting a financial advisor to find out if you are applicable for Section 44ADA.

• Doctors
• Lawyers
• Architects & Interior Designers
• Accountants Internal
• Consultants
• Actors
• Directors
• Musicians
• Freelance Writers

Does Section 44ADA Have a Limit?

Yes, Section 44ADA is only applicable if your gross receipts are less than or equal to ₹50 lakhs per year (including expenses). The limit is further increased to ₹75 lakhs per year if the income received in cash does not exceed 5%. Note that you will have to file at least 50% of your gross receipts as profits/in-hand income.

Downsides of Section 44ADA

While Section 44ADA reduces bookkeeping requirements, it has a few downsides that professionals should be aware of. Some common issues with this presumptive tax system include:

• Only applicable for individual self-employed professionals or certain small partnership firms.
• Section 44ADA will not be applicable if your gross receipts exceed ₹75 lakhs.
• Limit reduced to ₹50 lakhs if your cash income exceeds 5%.
• If limit is exceeded, then books will have to be maintained.
• 50% of receipts are presumed to be profits. This is disadvantageous if your profits are lower than 50%. In this case, your tax burden will increase even when your actual profits are reduced.
• You cannot claim any additional deductions on your expenses.
• If you opt for presumptive taxation under Section 44ADA, you will have to continue with the scheme for at least 5 years. If you exit the scheme before 5 years, then you will not be able to claim the 50% deduction under Section 44ADA for the next 5 years.

Conclusion

Section 44ADA is a useful provision for self-employed professionals who don’t want to regularly maintain accounts. This provision’s 50% deduction can be useful, it is a hard limit that cannot increase or decrease, irrespective of your current expenses or income. So, while this provision offers simplicity, it also takes away numerous avenues of tax deductions that would have been available to you otherwise. Keep this fact in mind when you choose this tax scheme as a self-employed individual. Choose the tax scheme that maximizes your savings in the long term.

 

Swati Tumar - Travel & Finance Writer   

Swati is a Writer in the day and an illustrator at night. Among her interests, she is quite fond of art and all things creative. She often indulges herself in creating doodles, illustrations, and other forms of content. She identifies herself as an avid traveler and shameless foodie.