The Income Tax Act’s Section 44ADA offers a special Presumptive Taxation Scheme (PTS) designed specifically for professionals. For qualified professionals, this program makes tax calculations and compliance simpler, promoting ease of doing business.
Section 44ADA of the Income Tax Act governs the provision of a presumptive taxation scheme (PTS) for specified professionals.
Qualification criteria for Section 44ADA.
A person or partnership firm that engages in a profession listed in sub-section (1) of section 44AA is eligible for a presumptive taxation system under section 44ADA (1), with the exception of LLPs.
Profession referred to Section 44AA (1)
Everyone who practices law, medicine, engineering, architecture, accounting, technical consulting, interior design, or any other profession that the Board notifies in the Official Gazette is eligible for the presumptive taxation scheme for professionals under section 44ADA. Section 44AA(1)
This does not, however, exclude people in other professions from choosing a presumptive taxation plan, including freelance IT professionals, tuition teachers (in academics, dancing, or drawing), or those who work from home. They can choose PTS, but only as a business, not as a career.
The Income Tax Act’s definition of “business” is comprehensive; it covers any form of trade, commerce, or manufacture and is broad enough to encompass activities requiring people’s time, attention, and labor in order to generate income. These activities can be regarded as falling under the definition of “business.”
In light of this, “considering the same, resident taxpayers engaged in professions other than as specified profession, i.e., IT professionals rendering routine services other than technical consultancy, providing tuitions (academic, dance, or drawing), can consider opting for the PTS under Section 44AD subject to the threshold limit as prescribed by the Act.”
Eligibility to opt PTS for Profession & Business as well
Medical professional
A doctor can do his professional duties and continue to trade in medicines at the same time. He is eligible for the benefits of both Sections 44ADA and 44AD, which apply to professional and trade income, respectively.
Chartered Accountant
The defined professional under section 44AA (1), a chartered accountant, who is a partner in a CA company and offers consulting services in his professional capacity, would be qualified to choose a presumption scheme under section 44ADA since his receipt qualifies as a professional receipt under this section.
Freelancers
Freelancers in any of the listed or unlisted professions are subject to the same regulations as any other full-time listed or unlisted professional. For instance, a salaried worker with a steady job might decide to work as a freelancer to supplement their income. In such cases, the gross income earned during a fiscal year is determined by adding the salary income to the revenues from freelancing activities. The whole annual income will be subject to taxation at the corresponding tax slab rate, it must be noted.
Illustration
Mr. Arindam makes Rs. 25 lakh in salary annually, plus Rs. 20 lakh in freelancing from technical consulting (specified profession). He has the option of choosing the presumed taxation plan allowed by section 44ADA. In this scenario, the total income will only be increased by 50% of the freelancing earnings, resulting in an annual income of Rs. 35 lakh. Mr. Arindam needs to submit an ITR-4.
Gross Receipts do not exceed Rs 50 Lakhs
The qualifying individuals may choose the presumptive taxation system under Section 44ADA if their total annual gross earnings from their profession do not exceed Rs. 50 lakhs. (Rs. 75 lakhs, subject to the requirement that the cash receipt therein does not exceed 5% of overall receipts, as amended by Finance Act 2023 and applicable as of AY 2024–25)
Taxable Professional Receipts
Amounts equal to 50% of gross receipts are deemed to be taxable professional receipts under the heading “profits and gains from the business” under this plan. If the assessee asserted earning more than 50%, that additional amount would be taxable.
Calculation of Taxable Professional Receipt
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Note: Professional expenses may include rent, electricity bill, consumables, cost of services taken from another professional, daily expenses, books, stationery, telephone charges, depreciation on assets (laptop, vehicle, printer, etc.), and any other expenses incurred to carry on the profession. It will not include personal expenses like household expenses, investments, gifts, repayment of housing loans, etc.
If the assessee said that they had earned more than 50%, then that additional amount is taxable. In the aforementioned illustration, Mr. Chirag made Rs. 26,00,000, which is more than half of the gross receipt of $50,000. Even if he chooses the presumption scheme described in section 44ADA, the taxable amount will still be Rs. 26 Lakhs and not 50% of gross revenue.
Under the presumptive taxation model, an assessee is not needed to keep books of accounts. The AO cannot request books of accounts from a person disclosing income under the Presumptive Taxation Scheme, as has been ruled in numerous case laws. However, if the return is chosen for inspection, the AO can assess the situation (using the data from AIS) and request more information.
The taxpayer must provide evidence that the additional revenue is unjustified.
If the tax is more than 50% of gross receipts, it is suggested to make a rough computation sheet and pay the tax on real receipts.
Deductions from Gross receipts
A taxpayer who chose the Presumptive Scheme under Section 44ADA is not permitted to claim any additional business expenses against taxable receipts.
The assessee may submit a chapter VI-A deduction claim, which covers sections 80C through 80U of the Act.
Under the Presumptive Taxation Scheme, there is no opportunity for the assessee to transfer losses over to later assessment years.
Professionals who have already opted into this tax provision may change their minds at any moment. There is no restriction for opting out in the next 5 years, in contrast to § 44AD (4).
Before March 15, 2023, Advance Tax can be paid in full rather than in installments.
Other relevant provisions
A taxpayer who chooses the presumptive taxation system is presumed to have deducted all possible expenses. After declaring a 50% profit, no further deduction claims are permitted.
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Separate deductions for depreciation are not permitted when calculating income in accordance with section 44ADA’s rules. However, the written down value of any asset used in such a business must be determined as though section 32 depreciation has been claimed and really permitted.
One can choose to use Section 44ADA of the Income Tax Act or not by keeping all the factors in mind.