Section 44ADA of the Income Tax Act, 1961, provides a presumptive taxation scheme for professionals who are engaged in specified professions. Similar to Section 44AD, which is applicable to businesses, Section 44ADA simplifies the process of calculating and maintaining accounts for professionals by allowing them to declare a percentage of their gross receipts as their taxable income.
Here’s a detailed explanation of Section 44ADA:
Eligibility:
Section 44ADA is applicable to:
- Resident individuals,
- Hindu Undivided Families (HUFs), and
- Partnerships (excluding LLPs)
who are engaged in specified professions. These professions include:
- Legal,
- Medical,
- Dental,
- Engineering,
- Architectural,
- Accountancy,
- Technical consultancy,
- Interior decoration,
- Film artists,
- Chartered Accountants
- Company secretaries, and
- Information technology professionals..
Presumptive Income & Percentage:
Under this section, eligible professionals are required to declare a presumptive income whose total gross receipts do not exceed 50 lakh rupees in a previous year.
The presumptive income is deemed to be the taxpayer’s income for taxation purposes, and detailed books of accounts are not required.
For professionals covered by Section 44ADA, the presumptive income is deemed to be 50% of the gross receipts. This means that 50% of the total gross receipts are considered as the taxable
But in case any person wants to show profit less than above limit than he will be liable for Tax Audit income.
Following provisos shall be inserted after sub-section (1) of section 44ADA by the Finance Act, 2023, w.e.f. 1-4-2024:
Provided that in case of an assessee where the amount or aggregate of the amounts received during the previous year, in cash, does not exceed 5% per cent of the total gross receipts of such previous year, this sub-section shall have effect as if for the words “50 lakh rupees”, the words “75 lakh rupees” had been substituted:
Important: for the purposes of the first proviso, the receipt of amount or aggregate of amounts by a cheque drawn on a bank or by a bank draft, which is not account payee, shall be deemed to be the receipt in cash.
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Advantages of Section 44ADA:
- Simplified Record Keeping: Professionals do not need to maintain detailed books of accounts, which reduces the burden of accounting.
- Tax Certainty: The tax liability is calculated on a presumptive basis, providing certainty about the amount of tax payable.
- Reduced Compliance: Since detailed accounts are not required, compliance becomes simpler and less time-consuming.
Disadvantages of Section 44ADA:
- Fixed Rate: The taxpayer needs to pay tax based on the presumptive rate, regardless of the actual profit or loss.
- No Deductions: The taxpayer cannot claim any deductions under Sections 30 to 38 of the Income Tax Act.
Example: Let’s consider an example to illustrate how Section 44ADA works:
Professional B:
- Profession: Chartered Accountant
- Gross Receipts: Rs. 20,00,000 (Rs. 20 lakhs)
- Presumptive Income Rate: 50%
According to Section 44ADA, the presumptive income for Professional B is calculated as 50% of the gross receipts:
Presumptive Income = 50% of Rs. 20,00,000 = Rs. 10,00,000
Professional B’s taxable income for the financial year would be Rs. 10,00,000, and they would be liable to pay taxes on this amount, regardless of the actual profit earned.
