Section 44ADA of Income Tax Act – Presumptive Taxation for Profession

What is Section 44ADA of Income Tax Act?

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 of Income Tax Act. FY 2016-17 onwards, a professional with gross receipts up to INR 50 lacs can take the benefit of presumptive taxation under Section 44ADA.

ITR for Professions u/s 44ADA (Presumptive Scheme)
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Who can opt for Presumptive Taxation under Section 44ADA of Income Tax Act?

A resident taxpayer engaged in any of the following professions can take advantage of the Presumptive Taxation Scheme under Section 44ADA:

  1. Legal
  2. Medical
  3. Engineering
  4. Architecture
  5. Accountancy
  6. Technical Consultancy
  7. Interior Decoration
  8. 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 of Income Tax Act, the following two conditions should be satisfied:

  1. The gross receipts of the profession should be less than or equal to INR 50 lacs.
  2. The taxpayer should report 50% or more of the gross receipts as income in the ITR.
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Example

Arjun is a freelance designer. His total receipts for FY 2019-20 is 45 lacs. The total expenses are INR 25 lacs that includes a subscription for designing software, salary, rent, electricity, travelling, etc.

Particulars Amount
Gross Receipts 45,00,000
Expenses (25,00,000)
Net Profit 20,00,000

Does not opt for Presumptive Taxation u/s 44ADA

  • Pay tax on INR 20 Lakhs 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

Particulars Amount (INR)
Gross Receipts 45,00,000
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)
Check Tax Audit Applicability u/s 44AB
Check Income Tax Audit applicability u/s 44AB to file Tax Audit Report Form 3CB - 3CD with your Income Tax Return.
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Check Tax Audit Applicability u/s 44AB
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FAQs

I am a freelancer and I opted for Presumptive Scheme u/s 44ADA. Can I claim expenses like internet, rent, travelling, etc?

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.

Do I need to pay advance tax if I opt for Presumptive Taxation Scheme under Section 44ADA?

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.

Do I need to maintain books of accounts if I opt for Presumptive Taxation Scheme under Section 44ADA?

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.

Presumptive Taxation Scheme : Everything you need to know

What is Presumptive Taxation Scheme?

The presumptive taxation scheme was introduced by the Income Tax Act, 1961 to give relief to small taxpayers from the tedious job of maintaining books of account and from getting the accounts audited. Generally, a person who receives income from a business or profession maintains books of accounts and prepares a balance sheet to understand the financial position of their business or profession over the financial year.

Any individuals, HUF, or partnership firms who avail presumptive taxation scheme can declare income at a predefined rate. Thus, they need not go through the cumbersome task of maintaining books of accounts and audit. Following are the presumptive taxation schemes available to small taxpayers as per Income Tax Act:

  • Section 44AD for small businesses
  • Section 44ADA for professionals
  • And, Section 44AE for businesses engaged in plying, hiring or leasing of goods carriages

Presumptive Taxation Scheme for Business

This scheme is designed to give relief to small taxpayers engaged in any business from maintaining any books of accounts. However, it does not include the business of plying, hiring or leasing of goods carriages referred to in section 44AE. Further, the Income Tax Provisions for maintaining books of accounts under Section 44AA & Audit under Section 44AB will not apply. The following assessees can avail Presumptive taxation under section 44AD:

  • Resident Individual
  • HUF
  • Partnership Firm (not Limited Liability Partnership Firm)
ITR for Businesses u/s 44AD (Presumptive Scheme)
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ITR for Businesses u/s 44AD (Presumptive Scheme)
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Non-Resident Indians (NRI) can not avail of the benefit of this scheme. Also, a person who has made any claim towards deduction under section 10A/10AA/10B/10BA or under section 80HH to 80RRB in the relevant year is not eligible for this scheme.

Presumptive Taxation Scheme for Professions

Earlier professionals were kept out of presumptive taxation scheme. However, in budget 2016 the government has extended a presumptive taxation scheme to the professionals too. Hence, professionals can also opt for presumptive taxation under section 44ADA. This benefit is available from FY 2016-17 onwards.

ITR for Professions u/s 44ADA (Presumptive Scheme)
CA Assisted Income Tax Return filing plan for Individuals & HUFs with professional income covered under Presumptive Taxation Scheme.
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ITR for Professions u/s 44ADA (Presumptive Scheme)
CA Assisted Income Tax Return filing plan for Individuals & HUFs with professional income covered under Presumptive Taxation Scheme.
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An assessee in a specified profession having gross receipts up to INR 50 lacs, can opt for Presumptive Taxation under Section 44ADA. It saves them from the burden of maintaining books of accounts and go for tax audit as per Section 44AB.

Presumptive Taxation Scheme Under Section 44AE

The scheme of section 44AE is designed to give relief to small taxpayers engaged in the business of plying, hiring or leasing of goods carriages.

Eligible Business as per Section 44AE

  • A person who engages in the business of plying, hiring or leasing of goods carriages and who does not own more than 10 goods vehicles at any time during the year. Including carriages taken on hire purchase or no installments.
  • The provisions of section 44AE are applicable to every person (i.e., an individual, HUF, firm, company, etc.).

Characteristics of the Scheme u/s 44AE:

  • A taxpayer doesn’t have to maintain books of accounts under section 44AA.
  • Turnover from a business should not exceed INR 2 Crore (INR 1 Crore until FY 2015-16)
  • Net Income from a heavy goods vehicle will be taken as INR 7,500 per month for each vehicle
  • A taxpayer will not be able to claim any business expenses against the income.
  • Such a taxpayer should file Form ITR 4 on the Income Tax Website.

Round off part of a month to the next month. For instance, if you have owned a goods carriage for 7 months and 5 days, the net income shall be calculated as if the carriage was owned for 8 months.

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FAQs

Can a doctor opt for presumptive taxation scheme?

Yes. With effect from the Financial year 2016-17, any professional be it a doctor or a chartered accountant or a lawyer can opt for Presumptive taxation scheme u/s 44ADA. However, the only condition is that the income from such a profession should not exceed INR 50 lacs and profits will be taken as 50% of such professional receipts.

Which businesses are not eligible for presumptive taxation  scheme?

The scheme of section 44AD is designed to give relief to small taxpayers engaged in any business, except the following businesses:
1. Business of plying, hiring or leasing goods carriages as per Section 44AE.
2. A person who is carrying on any agency business.
3. A person who is earning income in the nature of commission or brokerage
4. Any business whose total turnover or gross receipts exceeds two crore rupees.​

Income Tax for Freelancers, Consultants and Professionals

Who is a Freelancer?

Freelancer is a person who is self-employed, and have the freedom to choose their projects and companies they would like to be associated with. Just like every individual who receives income from salary, freelancers are also liable to pay income tax on their income. Some of the common professions for freelancing are:

  • a writer,
  • a software developer,
  • a photographer,
  • an interior decorator,
  • fashion designer, a blogger,
  • a gym instructor, etc.

Freelancers don’t earn a salary but run a business. The benefit that a freelancer gets while preparing income tax details is that expenses of a freelancer are allowed to be deducted from freelancers’ income.

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What does the Income of a Freelancer Include?

The sum of all the money one received against the work done is called gross receipt. If your receipts are received in a bank account then sum them up from your bank account statement. If you have received some money as loan from relatives or friends than it does not count as your income. Payment received towards freelancing work is considered as income from freelancing.

Income received from other sources such as interest on FD, rent from property are not included in the freelancing income. Such incomes are part of other heads of income in your return.

Books of Accounts for Freelancers

There are two methods of accounting to calculate the income of the freelancer:

  • Accrual Basis of Accounting: Here, the income is accounted for when it’s due.
  • Cash Basis of Accounting: Here, the Income is accounted only after it’s actually received.

Accrual Basis v/s Cash Basis Accounting

Let us first understand these methods of accounting. Here are some other aspects of these methods of accounting the Income:

Accrual Basis Cash Basis
Incomes are accounted when the right to receive occurs Incomes are accounted only when the cash is actually received.
For Example, you raise an invoice on your client on 7th February but receive the payment on 10th April, revenue would be booked in your accounts on the basis when invoice is raised to the client i.e, 7th February. Now, in the same case if it’s Cash Basis of Accounting, revenue would be accounted for only on 10th April (the tax year next to the year in which invoice was raised or work got completed) when payment is received.
Similarly, expenses are accounted right when the obligation is incurred. Expenses are accounted only after they’re paid off.
For Example, your Internet bill dated 18th February to 18th March has been received. This will be captured as an expense in the accounts of March, even if you don’t pay this until 31st March (even in the next tax year). Note that on an estimated basis your Internet cost for remaining 13 days of March may also be accrued when your books of accounts are closed on 31st March. Here, the same Internet bill will be booked as an expense in the month of March only if you pay it before the 31st March (in the same tax year). If you pay it in April, it will get booked as an expense in the next tax year (even when the expense pertains to the previous tax year)
Tax liability is considered for the booked income. So even the income yet not recieved may be liable for Tax. As here, the income is not booked until actually receiving it, the income not received yet will not be liable for Tax
This method can be followed for all types of income. In fact, it’s commonly used for Income from Salary, House Property, and Capital gains This method is only applicable to Profits and gains from Business and Profession and Income from Other Sources

It should be kept in mind that once you select a method of accounting, you’re not easily allowed to change it. You need to continue with it. That’s why it is very important to consider the pros and cons of both methods.

The Cash basis of accounting may seem a preferable option from the two, but one must consider that in the long run, it doesn’t help much with tax reduction, instead, it just postpones that particular amount of tax to the next year. If your payment receipts are not so irregular, Accrual Basis is a much logical option. The tax calculation can be done properly for the given year.

Calculate Income for Freelancers

When it comes to Income Tax for Freelancers, here’s how taxable income is calculated:

[Net Taxable Income = Gross Taxable Income – Deductions]

You’re liable to pay tax if your age is less than 60 years and your total taxable income is more than INR 2,50,000.

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Tax Payable for Freelancer

Now, if the total Tax Liability exceeds INR 10,000, the taxes are supposed to be paid every quarter. This is called the Advance tax. Here’s how to calculate Advance tax

  • Add up all your payments and determine your Total Income.
  • Subtract all the work-related expenses.
  • Add income from other sources if any.
  • Identify your slab rate applicable to you and calculate your tax due. (Deduct TDS)
  • If this Tax Due exceeds INR 10,000, you need to make the payment of Advance Tax by Due dates given below:
Due date of installment Advance Tax payable by Individual and Corporate Taxpayers
On or before 15th June 15% of the advance tax liability
On or before 15th September 45% of the advance tax liability
On or before 15th December 75% of the advance tax liability
On or before 15th March 100% of the advance tax liability

Freelancers and Professionals can opt for presumptive taxation scheme u/s 44ADA with effect from AY 2017-18. As a result, they can file ITR 4 and will not be required to maintain books of accounts. In the case of freelancers opting for a presumptive taxation scheme, the Advance Tax will have to be paid in a single installment before 31st March of the Financial year.

ITR for Professions u/s 44ADA (Presumptive Scheme)
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Freelancing Expenses Allowed as a Deduction

Freelancers can deduct expenses incurred exclusively towards the freelancing work. This could be anything from office rent, furniture or expense on a visit to a client. Freelancers cannot claim Personal expenditure as deduction. For example: If you are an app developer, you can deduct expenses on testing app and software purchase. If you have certain expenses like a cost of high speed internet connection that you use both for the personal and professional purpose you can allocate a reasonable percent to your freelancing work and deduct them.

  • Rent Expenses
  • Electricity Expenses/ Telephone Expenses/ Internet Expenses
  • Petrol/ Diesel Expenses
  • Travel Expenses relating to freelancing work
  • Local taxes and insurance of your business property
  • Meal, entertainment or hospitality expenses incurred on client
  • Depreciation on capital asset purchased for work( laptop, printers, car)
  • Office Expenses
  • Any other expenses incurred for the purpose of earning revenue

Deductions allowed under section 80C to 80U

Just like any salaried person, a freelancer can claim all the deductions listed under section 80, by fulfilling the conditions listed therein. For example, if you have made investments to PPF, NSCs, or paid life insurance premiums, you can avail deduction under Section 80C. In case of any medical premium paid by you, you can claim deduction under Section 80D.

TDS for Freelancers

The government of India has made regulations by which an individual/company paying an individual or another company for services offered needs to deduct TDSIn the case of freelance TDS is deducted at 10%. Individual/company from India having valid Tax Deduction Account Number (TAN) can only deduct TDS from your earnings. Unless your client has a TAN they are not eligible to deduct any TDS from your earnings. In many cases companies/individuals from outside India won’t have TAN, no TDS is applicable. In that case, depositing Advance Tax becomes freelancers’ liability. If any of your clients have deducted TDS on payments made to you, you can take credit for this tax deducted from your final tax dues.

You can claim a refund from the Income Tax Department if your income does not exceed the Basic Exemption Limit. You can also become eligible for a refund in case the total TDS exceeds the amount of your tax liability. Here are the other taxes applicable to Freelancers

  • Service Tax
  • Excise Duty
  • Sales Tax

ITR Form and Document Checklist

Freelancers need to either fill out ITR 3 or ITR 4 and need to keep ready the documents required to file the ITR. ITR 3 applies to income from business and profession. However, professionals can opt for the presumptive taxations scheme and declare 50% of their gross receipts as their income by filing ITR 4 from the AY 2017-18.

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Income Tax Return Forms to file depends on your Income Source, Residential Status, and other financial situation. Know which ITR Form you should file.
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FAQs

As a Freelancer, do I need to pay taxes?

Yes, absolutely. You need to pay taxes and file your income tax returns on Income Tax Portal if your total income for a particular financial year exceeds the Basic Exemption Limit prescribed by Income Tax Department

Which ITR do freelancers need to file?

A person earning on his own is considered a Sole Proprietor and needs to file ITR-4. If you have any other income source, you need to include that as well while filing your Income Tax Return.

Is Advance Tax applicable to Freelancers?

If the total tax liability during the financial year exceeds Rs.10,000, the taxpayer is required to pay taxes on quarterly basis. Hence, freelancers also need to pay advance tax if their total tax liability exceeds Rs.10,000.

Do freelancers need to maintain Book of Accounts?

Yes. In order to calculate the income tax, the Freelancers need to maintain them. In fact, the Income Tax Act has specified the books of accounts under section 44AA and Rule 6F.