Section 44ADA

Introduction

There is a common misunderstanding among people that the income earned through freelancing work is not subject to taxation. However, it is important to note that freelancers, professionals, and consultants are required to pay income tax on half of their gross annual income. The 44ADA of income tax act allows individuals to avail of this benefit, but only if their total income from freelancing activities in a financial year is less than Rs. 50 Lakhs. To fully utilize the advantages of this presumptive tax, it is essential to have a clear understanding of its basic principles.

What is 44ADA in Income Tax?

Section 44ADA is a provision in the Income Tax Act of India that provides information about Presumptive Taxation for professionals, which is intended to account for their profits and earnings. This section is applicable to professionals who have gross receipts of up to Rs. 50 Lakhs in a financial year.

Under 44ADA, professionals such as doctors, lawyers, architects, engineers, accountants, and others can declare their income at 50% of the gross receipts, and the income tax department will consider it as their taxable income. This provision was introduced to ease the compliance burden on small professionals who find it challenging to maintain their books of accounts and to promote the growth of small businesses in India.

Furthermore, it is essential to note that if a professional earns income from foreign clients, they are required to pay taxes on it.
 

What are the Objectives of Section 44ADA?

Some of the key objectives of this provision are:

Overall, the objective of Section 44ADA is to provide a conducive environment for small professionals to carry out their business activities and promote their growth, while ensuring that the tax revenue of the government is also collected efficiently.

Which Professions are Eligible Under Section 44ADA?

Professionals belonging to the following categories are eligible to avail the benefits of presumptive taxation under Section 44ADA of the Income Tax Act:

●    Accountants
●    Medical professionals
●    Legal professionals
●    Technical consultants
●    Architects
●    Engineers
●    Interior decorators
●    Company secretaries
●    Film artists 
●    Other professions as notified by the Central Board of Direct Taxes

It should be noted that the presumptive taxation regime under Section 44ADA is applicable to the following types of residents - individuals, Hindu Undivided Families (HUFs), partnerships other than Limited Liability Partnership (LLP) firms. This means that professionals who fall under these categories and have gross receipts up to Rs. 50 Lakhs in a financial year can take advantage of the benefits of presumptive taxation.
 

Rate of Presumptive Tax under Section 44ADA

The rate of presumptive tax under Section 44ADA is fixed at 50% of the gross receipts of eligible professionals. This means that if a professional has gross receipts of Rs. 10 Lakhs in a financial year, he/she will be required to pay tax on Rs. 5 Lakhs (50% of gross receipts) as per the income tax slabs applicable for that year. 
It is important to note that professionals who opt for presumptive taxation under Section 44ADA cannot claim any deductions or expenses against their income, and they are required to pay tax at the prescribed rate of 50%.

Benefits of Presumptive Income Under Section 44ADA

The benefits of presumptive income under Section 44ADA are as follows:

●    Easy compliance: Professionals who opt for presumptive taxation under Section 44ADA are not required to maintain any books of accounts or get them audited. This simplifies the compliance requirements for these professionals, as they do not have to spend time and money on maintaining accounting records and getting them audited.

●    Lower tax liability: Since the tax is calculated on a presumptive basis at a fixed rate of 50% of the gross receipts, eligible professionals can enjoy a lower tax liability. This is particularly beneficial for professionals with low gross receipts, as they may not be able to claim many deductions against their income.

●    Cash flow benefits: Presumptive taxation helps in managing the cash flow of eligible professionals, as they can pay tax on a fixed percentage of their gross receipts without having to worry about maintaining books of accounts or claiming deductions.
 

Exemptions Under Section 44ADA

Individuals who conform with Section 44ADA of the Income Tax Act are liable to a variety of privileges, including:

●    They are entitled to all deductions permitted by Sections 30 to 38 of the Income Tax Act, including deductions for business expenditures, unabsorbed depreciation, and other allowances.

●    After claiming the authorised depreciation deductions, the WDV (Written Down Value) of depreciable assets can be recalculated. This implies that professionals who have chosen the Section 44ADA presumptive tax plan can claim depreciation on their assets and lower their taxable income proportionately.

Provision for Salaried Individuals Under the Presumptive Tax Regime

In case of salaried individuals who undertake freelance work to supplement their income, their salary income and earnings from freelancing activities are combined to calculate the total income earned in a financial year. This combined income is then subject to taxation based on the individual's applicable tax slab rate.

For instance, let's say Ankit earns a salary of Rs.15 Lakhs per year and earns an additional Rs. 5 Lakhs through freelance work. If Ankit opts for the presumptive taxation scheme under Section 44ADA, he can add only half of his freelance income, i.e., Rs. 2.5 Lakhs, to his total income. Thus, his total income for the year will be Rs. 17.5 Lakhs. It is important to note that Ankit will have to use ITR-4 while filing his Income Tax Returns in such a case.

Things to Consider Before Opting for Section 44ADA

Before opting for Section 44ADA of the Income Tax Act, individuals must take into consideration certain factors:

●    Actual expenditure: Professionals with a low net profit ratio should evaluate their actual expenditure and determine if this tax provision would be beneficial for them.

●    Remuneration to partners: There is no provision that allows professionals to deduct remuneration paid to partners from any presumptive income.

●    Partner's interest or salary: Even if a professional firm does not adopt this tax provision, its partners can still opt for Section 44ADA in terms of interest or salary received for the same firm.

●    Opt-out option: Unlike some specific types of taxpayers, professionals who had previously chosen this tax provision can opt-out of it at any time.

Considering all these aspects, individuals can decide whether to opt for Section 44ADA or not. Additionally, they can explore ways to maximize their benefits from this tax provision and save more on their annual income tax liabilities.