What is Section 44ADA of Income Tax Act?
Section 44ADA of the Income Tax Act, introduced in the financial year 2016-17, offers a presumptive tax scheme specifically for eligible professionals. Presumptive taxation means the government presumes your income to be a certain percentage of your gross receipts (total earnings) instead of requiring you to maintain detailed accounting records and claim individual business expenses.
In simpler terms, Section 44ADA allows you to pay taxes on a predetermined portion of your earnings, eliminating the need for complex bookkeeping and expense documentation. This simplifies tax filing for eligible professionals and potentially reduces their tax burden.
Who is Eligible for Presumptive Tax Scheme under Section 44ADA?
The presumptive tax scheme under Section 44ADA isn't open to everyone. It applies to a specific group of professionals as follows:
- Professionals: This scheme is designed for individuals engaged in specific professions listed under Section 44AA(1) of the Income Tax Act. These professions typically involve offering services and have relatively low operational costs. Examples include doctors, engineers, lawyers, architects, interior decorators, and chartered accountants.
- Partnership Firms: Partnership firms (not Limited Liability Partnerships or LLPs) can also avail themselves of the benefits of Section 44ADA, provided they meet the other eligibility criteria.
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Gross Receipt Limit: There's a ceiling on the annual gross receipts (total earnings) for availing of this scheme. As per the latest budget, professionals with gross receipts up to ₹50 lakh can benefit from Section 44ADA. However, there's an added benefit:
- Higher Limit with Digital Transactions: If you receive at least 95% of your total earnings through digital channels (like bank transfers or online payments), the eligibility limit for availing of Section 44ADA increases to ₹75 lakh. This encourages digital transactions and promotes a more transparent financial system.
Who Should Maintain Books of Accounts and Getting Accounts Audited?
Professionals eligible for presumptive scheme under Section 44ADA are not required to maintain books of accounts and get their accounts audited. However, if an assessee meets any of the following bars, then they must keep books of accounts and get their accounts audited under section 44AB:
- Gross receipts exceed ₹50 lakhs in the previous year (the limit increases to ₹75 lakhs if cash receipts are within 5% of the total gross receipts of that year).
- Income from the profession is offered at a reduced rate to 50% of the gross receipts (i.e., expenses claimed exceed 50% of the gross receipts), and the total income is more than the basic exemption.
Calculation of Presumptive Income under Section 44ADA of the Income Tax Act
The Presumptive Tax Scheme was introduced to simplify tax calculation and the filing process, making it evident that calculating income and taxes under this scheme is straightforward. However, an assessee must meet the following conditions to be eligible for this scheme:
- Gross annual receipts of the assessee should be under ₹50 lakh and ₹75 lakh if at least 95% of the gross receipts are through recognized banking channels (e.g., account payee cheque, demand draft, electronic clearing system),
- Eligible professionals include interior decorators, technical consultants, engineers, accountants, lawyers, doctors, architects, and others.
Presumptive Income Calculation
Under this scheme, 50% of the gross total receipts are deemed to be the profit and gains of the profession. For example, if you are a practicing CA with annual gross total receipts of ₹44 lakh, your income will be presumed to be 50% of this amount, which is ₹22 lakh.
Once you've calculated your presumed income, you'll need to pay tax on that amount as per the applicable tax slabs and rates. The benefit of Section 44ADA lies in potentially lowering your tax liability compared to the regular method that considers all your business expenses.
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