Streamlining Taxation for Professionals: A Comprehensive Analysis of Section 44ADA

Spend More Time on Your Profession, Less on Taxes: Leverage 44ADA Presumptive Taxation!

What is Section 44ADA of the Income Tax Act?

Section 44ADA provides a unique provision for determining the income and gains of small professions. To include specific specialists in the streamlined presumptive taxation structure, Section 44ADA was enacted. The presumptive tax scheme was previously limited to small enterprises. The presumptive taxation model makes doing business easier and lessens the regulatory load for small professions. Profits are assumed to be 50% of gross receipts under the presumptive tax structure.

Understanding Section 44ADA

Taxpayers don't need to maintain accounting records mentioned earlier. Profit can be calculated as a percentage of total yearly sales. However, if total income exceeds the exemption threshold and income is less than 50% of receipts, accounting records must be kept, and an audit might be required. Professionals must pay taxes on earnings from clients in India or abroad.

Applicable to which Entity

Section 44ADA is applicable to Resident individuals and Partnership Firms (excluding LLPs)

Applicable to which Profession

Engineers	Legal services (Advocate)
Architecture (Architect)	Accountants (CA)
Medical services (Doctor)	Technical consultants
Interior Decorators	Company Secretary
Information Technology

Turnover limit u/s 44ADA from FY 2023-24 (AY 2024-25)

A profession is eligible for presumptive taxation if:

- Its gross receipts are 50 lakhs or less in the previous year (PY), OR

- Its gross receipts are 75 lakhs or less in the previous year, but only if cash receipts amount to less than 5% of the total gross receipts.

In simpler terms, if gross receipts are between 50 lakhs and 75 lakhs, the benefit applies only if cash receipts are less than 5% of the total gross receipts in the relevant PY.

Tax Rate and Advance tax benefit

If your total income from your profession is less than fifty lakh rupees in a year, you only need to pay tax on fifty percent of your total income. This simplified taxation method is called presumptive income. Moreover, you need to pay advance tax by 15th March of the financial year if you choose this option.

You can check Zeal’s Presumptive Income Tax Filing

Impact when the declared income is below 50%.

Under this section, if an individual chooses to declare income lower than the estimated amount:

- They must maintain books of account and relevant documents as per Section 44AA if their total income exceeds the maximum exemption limit.

- They must also undergo auditing and provide an audit report as per Section 44AB, regardless of turnover or gross receipts, if their total income surpasses the maximum exemption limit.

Impact of opting for Section 44ADA

- No Further Deductions Allowed: The estimated income includes all deductions under sections 30 to 38. No additional deductions from these sections are permitted.

- Depreciation Already Accounted For: The value of assets will be calculated as if depreciation has already been taken into account.

- Additional Income Included: The estimated income is combined with any other income the individual or business has, from other sources or categories. Deductions under Chapter VIA can still be claimed as usual.

- Losses from Previous Years: If there are any losses carried forward from previous years, they will be deducted from this estimated income according to the tax laws.

Situations

Particulars	Situation 1	Situation 2	Situation 3
Gross Receipt	30,00,000	55,00,000	80,00,000
Expenses	10,00,000	0	0
Cash receipt	0	2,25,000	0

Let’s check what happens in various situations

Situation 1:

Particulars	Under Normal Provision	Under Presumptive Scheme
Gross Receipt	30,00,000	30,00,000
Less: Expenses	10,00,000	0
Presumptive income at 50% of the gross receipts	0	15,00,000
Net Profit	20,00,000	15,00,000

Mrs. Mitshu can utilize presumptive taxation under Section 44ADA and her taxable income would be determined as 50% of her total gross receipts.

Situation 2:

In situation 2, the total receipt is below the presumptive limit of Rs. 75 lakh and the cash receipt is less than 5% of the total receipts (Rs.2,25,000/- which is below 5% of Rs.55,00,000/-). Hence, Mrs. Mitshu can opt for the presumptive taxation scheme under section 44ADA. And the taxable income chargeable is 50% of the total receipts.

Situation 3:

In the above situation, the total receipt is above the presumptive limit of Rs. 75 Lakhs. Hence, Mrs. Mitshu cannot opt for the presumptive taxation scheme under section 44ADA.

Conclusion

In summary, Section 44ADA provides a simplified method of taxation for certain professionals, allowing them to declare their income at a prescribed rate without the need to maintain detailed books of accounts or report actual expenses. This scheme aims to reduce the compliance burden for small professionals and streamline the taxation process.

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