To provide relief to small taxpayers from the tedious task of maintaining books of accounts and getting books of accounts audited, the CBDT had introduced the Presumptive Taxation Scheme. Under Budget 2016, the finance minister introduced the presumptive taxation scheme for specified professionals under Section 44ADA. FY 2016-17 onwards, a professional with gross receipts up to INR 50 lacs can take the benefit of presumptive taxation under Section 44ADA.
Who can opt for Presumptive Taxation under Section 44ADA?
A resident taxpayer engaged in any of the following professions can take advantage of the Presumptive Taxation Scheme under Section 44ADA:
- Technical Consultancy
- Interior Decoration
- Any other specified profession that CBDT notified
- Film Artists – cameraman, producer, editor, dance director, actor, director, music director, art director, lyricist, story writer, screenplay or dialogue writer, singer, and costume designers.
- Authorised Representatives – a person who represents someone before a tribunal or any legal authority in exchange for a fee. It does not include an employee of the person or a person who is carrying on the profession of accountancy.
Calculation of Presumptive Income under Section 44ADA of Income Tax
To opt for Presumptive Taxation Scheme under Section 44ADA, the following two conditions should be satisfied:
- The gross receipts of the profession should be less than or equal to INR 50 lacs.
- The taxpayer should report 50% or more of the gross receipts as income in the ITR.
Arjun is a freelance designer. His total receipts for FY 2019-20 is 45 lacs. The total expenses are INR 15 lacs that includes a subscription for designing software, salary, rent, electricity, travelling, etc.
Does not opt for Presumptive Taxation u/s 44ADA
- Pay tax on INR 20 lacs as per the slab rate.
- Maintain books of accounts as per Sec 44AA.
- Go for Tax Audit since the profit is less than 50% of gross receipts and total income is more than the basic exemption limit of INR 2.5 lacs.
Opts for Presumptive Taxation u/s 44ADA
|Presumptive Income (50%)||22,50,000|
- Pay tax on INR 22.5 lacs as per slab rate.
- Do not maintain books of accounts as per Sec 44AA.
- Do not go for Tax Audit since the profit is at least 50% of gross receipts.
Income Tax on Presumptive Income under Section 44ADA
- Income Head and Tax Rate – Income under the presumptive taxation scheme is a business income classified under the head PGBP. Such income is taxable at slab rates as per the Income Tax Act.
- Claiming Expenses – Since the taxpayer reports a fixed percentage of gross receipts as the income, he/she is not allowed to claim expenses. However, they can claim deductions under Chapter VI-A.
- Payment of Advance Tax – Taxpayer opting for presumptive taxation scheme under Sec 44ADA should pay the entire amount of advance tax on or before 15th March of the financial year. If the advance tax payment is not done before the due date, interest under Section 234C is levied. The interest would be levied only if the tax liability exceeds INR 10,000.
- ITR Form – Taxpayers opting for presumptive taxation under Sec 44ADA should report such income as PGBP Income and file Form ITR-4 on the Income Tax Website. They must mention the specified Business and Profession Codes based on the nature of the profession. If the taxpayer has income from capital gains along with presumptive income, he/she should file Form ITR 3.
Tax Audit and Books of Accounts for Presumptive Income under Section 44ADA
- Books of Accounts under Sec 44AA – If a taxpayer opts for a presumptive taxation scheme u/s 44ADA and reports income at 50% or more of the gross receipts, he/she is not required to maintain books of accounts as per Sec 44AA.
- Applicability of Tax Audit – If a taxpayer declares income less than 50% of gross receipts and the total income exceeds INR 2,50,000 (basic exemption limit), he/she should maintain books of accounts and get the books of accounts audited under Section 44AB(d)
Section 44ADA of Income Tax – 5 Year Rule
As per this rule, if a taxpayer opts for the presumptive taxation scheme in a financial year, he/she should opt for it for the next 5 financial years continuously. However, if the taxpayer fails to do so, he/she would not be able to take the benefit of presumptive taxation scheme for the next 5 financial years. For eg: A professional opts for Sec 44ADA for AY 2018-19 and AY 2019-20. However, for AY 2020-21, he does not opt for the presumptive taxation scheme. In this case, he will not be eligible to claim the benefit of the presumptive taxation scheme for the next five AYs, i.e. from AY 2021-22 to AY 2025-26.
A freelancer who has opted for Presumptive Scheme u/s 44ADA should report 50% or more of gross receipts as income. There is an option to declared a fixed percentage of receipts as profit and not maintain any books of accounts. Thus, the freelancer cannot claim any further expenses. However, he/she can claim Chapter VI-A deductions like LIC premium, mediclaim premium, donations, etc.
Yes. If the total tax liability for a financial year exceeds INR 10,000, you must pay advance tax. If you have opted for presumptive taxation scheme u/s 44AD or 44ADA, you are required to pay advance tax on or before 15th March instead of 4 installments in other cases. However, if you fail to pay advance tax by 15th March of the financial year, interest is Sec 234B and Sec 234C is required to be paid.
A person engaged in specified profession having gross receipts up to INR 50 lacs has the option to opt for Presumptive Taxation Scheme under Sec 44ADA. He/she can report 50% or more of gross receipts as income and pay tax on it. If they opt for Presumptive Taxation, they are not required to maintain books of accounts as per Section 44AA. They are also not liable for Tax Audit as per Section 44AB.