Simplifying Taxes for Small Professionals: Understanding Sections 44ADA

Author name: Ashish Gambhir

Created date: 29-05-2024

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Maintaining the complexities of income tax can be difficult for small business owners and professionals. To ease this burden, the Indian Income Tax Act offers a simplified presumptive taxation scheme under Sections 44AD and 44ADA. These provisions are designed to streamline tax compliance and reduce the administrative load on micro, small, and medium enterprises (MSMEs) and certain professionals by allowing them to declare income on a presumptive basis. In this blog, we will discuss the specifics of these sections, exploring their eligibility criteria, benefits, Key Points to remember and how they can simplify the tax filing process for eligible taxpayers

Eligibility:

Under the section 44ADA, the eligible assesse mentioned in section 44AA engaged in the specified profession with a total turnover or gross receipt of 50 lakhs or below are allowed to take benefit of this section. They are not required to maintain any books of accounts nor required for audit. As introduced in Finance act 2023, the limit of 50 lakhs have been extended, if 95% of total turnover or gross receipts are received in digital form, to 75 lakhs.

As provided in the Income tax act 1961, any individual, HUF or Partnership (Except LLP) can opt for this section

Professions specified in income tax act-

1. Legal
2. Medical
3. Engineering
4. Architecture
5. Accountancy
6. Technical consultancy
7. Interior designer
8. Any other profession specified in official gazette

Presumptive Income:

Taxpayer are allowed to declare their income at prescribed rate of 50% of the total turnover or gross receipts or the actual profit amount higher than the aforesaid amount.

As stated in income tax act, the percentage given to declare profit is 50% which is minimum and not maximum so in case any assesse has income greater than this limit, he/she should declare higher income. This presumptive scheme should not be misinterpreted to show lower income instead this scheme allows taxpayer to take benefit of not maintaining books and records for his/her actual income.

Points to keep in mind

• By opting this section, it will be considered that all the deductions available under section 30 to 38 are already availed and you cannot further take any deduction.
• The WDV of any asset will be deemed as calculated as provided in section 44ADA.
• Assesse will have to maintain book of accounts, other records and will be required for audit as per Section 44AB if they claim their profit to be lower than 50% of their total turnover or gross receipt.
• Your expenses will also deemed to be deducted from total turnover or gross receipts.
• If your actual profit is more than the presumptive amount then you should declare higher profit as specified in Income tax Act
• Taxpayer will have to pay advance tax in one installment on or before 15 th March of every Financial year.
• Although limit of 50 lakh has been increased to 75 lakh but taxpayer should remember the provisions of deducting TDS under section 194 as the limit under those section is still 50 lakh. So in case a person opting 44ADA still have to follow TDS provisions.

Opting out of 44ADA

Unlike 44AD, Assesse can choose to opt out from the benefit of this section and again opt in in any previous year. There is no restriction on taxpayer to continue to opt this section for continuous 5 years.

Let’s understand this from an example:

Example 1:
Mr A has a turnover of Rs 60 lakh and doing his transactions digitally so in his case he can opt for 44ADA and can claim the benefit according to 75 lakh. He can report his income @ 50% of gross receipts or actual profit whichever is higher. After limit of Rs 50
lakh, He will have to deduct TDS on his expenses from next financial year as per the TDS provision of Income Tax Act.

Example 2:
Mr B has a turnover of Rs 70 lakh and want to report his profit lower than 50% of gross receipts then he will have to maintain books of accounts and get his accounts audited as per Section 44AA and 44AB.