To reduce the compliance burden for small professionals, the Income Tax Act introduced the Presumptive Taxation Scheme under Section 44ADA. This scheme is especially useful for professionals like doctors, lawyers, architects, engineers, and others specified under Section 44AA.
Section 44ADA allows eligible professionals to declare a fixed percentage of their gross receipts as income, without the hassle of maintaining detailed books of account or undergoing tax audits.
Professionals with gross receipts up to ₹50 lakhs can avail the scheme.
From FY 2023-24 onwards, the limit has been enhanced to ₹75 lakhs, provided that at least 95% of the receipts are through banking channels (like cheque, online transfer, or UPI).
By opting for this scheme, professionals enjoy the following:
✅ No need to maintain books of accounts as required under Section 44AA
✅ No requirement of audit under Section 44AB
✅ Simplified return filing with fewer documentation hassles
Income is presumed to be 50% of the gross professional receipts. For instance:
📌 Example:
Dr. Akash earns ₹40 lakhs during the year. Under Section 44ADA, he can declare ₹20 lakhs (i.e., 50%) as income. The remaining ₹20 lakhs is presumed to be professional expenses.
But here’s where most people get it wrong…
Many believe that income under 44ADA can always be declared as 50% of gross receipts – regardless of actual expenses or cash flows. This is not true.
📌 Reality:
If your actual income exceeds 50% of your receipts, you must declare the higher income. The tax authorities may assess your income using two methods:
Let’s say Dr. Akash has ₹40 lakhs as gross receipts but only incurred ₹5 lakhs as expenses. The rest of the money (₹35 lakhs) is invested or spent personally. In this case, Dr. Akash must declare ₹35 lakhs as income – not ₹20 lakhs.
The tax department can also look at changes in your assets, liabilities, and personal expenses to determine your actual income.
📌 Example:
Dr. Ajith’s Financial Snapshot
| Particulars | FY 2021-22 | FY 2022-23 |
|---|---|---|
| Assets | ₹50 lakhs | ₹75 lakhs |
| Liabilities | ₹20 lakhs | ₹10 lakhs |
Personal expenses during the year: ₹5 lakhs
Gross professional receipts: ₹45 lakhs
📊 Income Calculation (Indirect Method):
Increase in assets = ₹25 lakhs
Decrease in liabilities = ₹10 lakhs
Personal expenses = ₹5 lakhs
Total = ₹40 lakhs
So, Dr. Ajith must declare ₹40 lakhs as income, not ₹22.5 lakhs (which is 50% of ₹45 lakhs).
If professionals continue to declare only 50% of their receipts when actual income is higher, the Income Tax Department may treat the differential as unexplained income/investment/expenditure, which can be taxed at a whopping 78% along with 10% penalty.
Section 44ADA is a powerful tool for small professionals to simplify tax compliance. However, it comes with a responsibility to assess actual income carefully. Here’s what you should remember:
You can declare higher income than 50%, and must do so if actual profits are more.
You can declare lower income, but only if you maintain books of accounts and get them audited.
| Situation | Action Required |
|---|---|
| Income = 50% of receipts | Opt for 44ADA, no audit/books needed |
| Income > 50% of receipts | Declare higher income, no audit needed |
| Income < 50% of receipts | Maintain books and get audit done |
Smart compliance is better than risky shortcuts. Use Section 44ADA wisely and stay clear of unwanted scrutiny!
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