Presumptive taxation scheme for professional section 44ADA was brought into effect from the financial year 2016-17. It provides a simple and efficient method of taxation for professionals whose annual gross receipts derived from profits and gains from business and professions does not exceed Rs. 50 lakhs.
It reduces compliance burden on small professionals and facilitates ease of doing business. Thereby, under this scheme, taxes are presumed at 50% of the gross receipts.
Who is eligible for Presumptive Taxation Scheme for professional section 44ADA
The following residents of India who come under the category of;
- Individuals
- Hindu Undivided Family [HUFs]
- Partnership firms [except limited liability partnerships]
are eligible assessees under the scheme provided under section 44ADA.
For this purpose, the section also defines “Professionals”. Professionals mentioned under section 44AA of the Income Tax Act, 1961, whose gross receipts are less than Rs. 50 lakhs in a year are the eligible assessees.
The definition of “Professionals” includes;
- Interior decorators
- Technical consultants
- Architects
- Doctors
- Lawyers
- Accountants
- Engineers
- Other professionals such as;
- Movie artists, such as producers, directors, editors, actors, etc.
- Authorized representatives i.e. person who represents another for a fee before a court o law or any authority constituted under any law (excluding cases where the representative is the employee of the person or a person carrying on profession of accountancy)
- Any other notified professional.
How much presumptive income is considered for an assesse?
The assessee can claim the higher of the following as their presumptive income;
- 50% of total receipts from profession.
- Income offered by the assessee from the profession.
This can be understood better by using a common example using bifurcation between the general and the presumptive schemes.
For example; a professional architect whose receipts are Rs. 40 lakhs. And his annual expenses towards rent travelling etc. stand at Rs. 15 lakhs.
The following table shows distinction between the two taxation procedures.
| Under normal tax regime | Amount in Rs. | Under presumptive taxation scheme | Amount in Rs. |
|---|---|---|---|
| GROSS RECEIPTS | 40,00,000 | GROSS RECEIPTS | 40,00,000 |
LESS: EXPENSES | 15,00,000 | LESS: 50% DEEMED EXPENSES | 20,00,000 |
NET PROFIT | 25,00,000 | NET PROFIT | 20,00,000 |
Therefore, the above table clearly depicts that it is beneficial for the architect to opt for the presumptive scheme of taxation as comparatively his taxable income is lower than the normal tax regime.
Benefits of Presumptive Taxation Scheme for professional section 44ADA
The scheme provides for the following benefits to the professionals eligible under section 44ADA;
- The assessee need not maintain books of accounts
- Thereby, the assessee has no obligation of having accounts audited.
However there exist limitations to the aforementioned benefits in case;
- Income of the professional is offered at a lower rate than 50% of gross receipts and
- Total income of the assessee exceeds the basic exemption limit.
In these scenarios the assessee forgoes his benefit of not maintaining books and he also has to get his accounts audited as per the provisions of Income Tax Act, 1961.
For the purpose of computation of deduction of business expenses which are deemed to have been allowed to the professional, care should be taken while computing the expenses which are to be allocated for the remaining 50% of the deemed income excluded under expenses. Business expenses may include rent, daily expenses, telephone charges, stationary, depreciation on assets (laptop, vehicle, printers etc.) and also the expenses incurred for carrying on the profession.
And the depreciation thereon is to computed under the Written Down Value (WDV) of the assets for tax purpose and shall be calculated as depreciation allowed for each financial year. The written down value is to be concluded as the value of the asset in case of sale of asset by the assessee.
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