Section 44ADA - Presumptive Tax for Professionals

Section 44ADA of the Income Tax Act computes the gains of small-scale professionals. This section allows you to assume that half of your annual gross receipts are your income, and you pay tax on that amount.

Earlier, this scheme covered only small business owners, but now it is extended to professionals such as doctors, lawyers and engineers.

Significant updates to this section were made in the 2023 budget. For example, if you are a professional, your annual gross receipts don't exceed ₹75 lakh, and you ensure that 95% of your transactions are digital, you can take advantage of this presumptive taxation scheme.

This is a jump from the previous 44ADA limit of ₹50 lakhs. For small businesses, the turnover limit is revised to ₹3 crores from the previous ₹2 crores.

Reduced Audit Requirement: Eligible professionals with gross receipts under the threshold are not required to have their accounts audited. This allows them to focus more on their business and look for new opportunities to boost revenue flow.

Cash Receipts Limit: As said before, to encourage digital transactions, the limit increase is conditional on having 95% of receipts through online mode. Shifting to digital transactions helps businesses manage their finances better.

To qualify under this scheme, you need to meet the following criteria:

• If you are an individual professional, such as a doctor, lawyer, or architect, and your annual gross receipts are less than ₹75 lakh, you are eligible for this scheme.

• Your partnership firm (excluding Limited Liability Partnerships) can opt for this scheme if it involves a profession outlined in sub-section (1) of section 44AA, like engineering, accounting or technical consulting.

• You are eligible if you are engaged in legal, medical, engineering, architectural, accountancy, technical consultancy, interior decoration or any other profession notified by the Board in the Official Gazette.

• Movie artists include editors, directors, producers, actors, music directors, art dance directors, directors, lyricists, camerapersons, singers, screenplay or dialogue writers, story writers and costume designers.

• Additionally, authorised representatives who represent someone for pay before any tribunals or authority constituted under law, except employees of the represented person or accountants, are also eligible.

Suppose you are a freelance graphic designer. Your total annual receipts in the financial year are ₹25 lakhs. You spent ₹7 lakhs on travelling to meet your clients, rent, conveyance, and a few utility-related expenses.

Here are your taxable incomes under the normal and presumptive schemes.

Normal Circumstance:

Considering the above example, if you wish to opt for the presumptive scheme, you only have to pay a tax of ₹12,50,000.

The concept of freelancing is common these days. People engage in it to generate additional income while continuing their full-time jobs. In this scenario, salary income is combined with freelancing income for taxation to determine the accrued gross total income in the particular financial year.

The tax here will be levied based on the income tax slab of such a person.

Suppose your total salary income is ₹17 lakhs. You make around ₹10 lakh from freelancing. In this scenario, you can add half of your freelance income to your total earnings. This makes your annual gross income ₹22 lakhs. It is essential to mention that while filing ITR in such a scenario, you must use ITR-4.

Evaluate your actual expenses. Since the scheme taxes a fixed percentage of gross receipts, it might not benefit professionals with high operating costs.

• While detailed books of accounts are not required, maintaining essential records of business transactions is necessary.

• If you have foreign-based clientele, you must also pay tax on that income.

• You, as a professional, have the option to opt out of this scheme anytime you wish.

• Partners of a professional firm are entitled to individually choose Section 44ADA for their share of interest or remuneration from the firm, even if the firm itself has refrained from opting for this scheme.

• If you choose this scheme, you must pay the entire advance tax amount by March 15th of the previous year. If you fail to do so, interest penalties are imposed per the provisions of section 234C.

Section 44AD

This scheme applies to small businesses with gross receipts or turnover below ₹2 crores. However, once chosen, you must stick with this scheme for five consecutive years. Under Section 44AD, income computation is based on a presumptive basis at a 6-8% rate.

Section 44AE

This scheme applies to small business owners engaged in plying, hiring, or leasing goods carriages. You can opt for the Presumptive Taxation Scheme if you own fewer than ten goods vehicles during the financial year.

Your income is presumed to be a fixed amount of ₹7,500 per vehicle per month or part of a month, regardless of the actual earnings.

Section 44ADA allows professionals mentioned under this section to pay their taxes under a more simplified tax system. However, professionals can only opt for this scheme if their total income does not exceed ₹75 lakhs, and they must file their tax returns under ITR-Form 4.

As a professional, a presumptive scheme is not the only way to save on tax. You can also put some money towards pre-existing disease health insurance and save tax under section 80D.

A health insurance plan from reputed insurers like Tata AIG protects you against hefty bills related to hospitalisation, consultation, pharmacy, and screening tests.

When you buy health insurance online, you must consider the claim settlement ratio, co-pay clause, room rent capping, and a few others. Remember, the earlier you buy medical insurance, the lower your premium will be.