The Income-tax Act provides certain provisions to simplify the taxation process for professionals, such as doctors, lawyers, architects, engineers, and other specified professionals. One such provision is Section 44ADA, which introduces a presumptive taxation scheme exclusively for professionals. In this article, we will discuss about of Section 44ADA and its benefits for professionals. The professional whose gross receipts are below Rs. 50 lakh can opt for a presumptive taxation scheme u/s 44ADA.
Table of contents
- Quick Summary of 44ADA (A.Y.2023-24)
- Changes in 44ADA (A.Y. 2024-25)
- What is Section 44ADA?
- Eligibility for Section 44ADA
- Ineligibility for Section 44ADA
- How to Calculate Income Under Section 44ADA
- Benefits of Section 44ADA
- Limitations and Conditions
- Comparison Between 44ADA vs. 44AD vs 44AE
- FAQ on Section 44ADA
Quick Summary of 44ADA (A.Y.2023-24)
Here is the quick summary of 44ADA for A.Y.2023-24.
|Eligible Taxpayers||Individuals, Partnership Firms (excluding LLPs)|
|Covered Professions||Legal, Medical, Engineering, Architecture, Accountancy, Technical Consultancy, Interior Decoration, and others as notified by CBDT|
|Gross Receipts Limit||Up to Rs. 50,00,000 (or Rs. 75,00,000 for A.Y. 2024-25 if cash receipts are less than 5% of total)|
|Presumptive Rate||50% of gross receipts|
|Declaration of Income||Taxpayers have the option to declare higher income, but minimum presumed income is 50% of gross receipts|
|Expenses||No further deductions or expenses can be claimed once income is computed at prescribed rate|
|Advance Tax Payment||Full payment of advance tax by March 15 of the previous year|
|Maintenance of Books||Not required|
|Tax Audit Requirement||Not required, except if income declared is lower than 50% of gross receipts or exceeds the basic exemption limit|
|Minimum Period of Scheme||Must follow the scheme for at least five consecutive years, or become ineligible for the next five years|
Changes in 44ADA (A.Y. 2024-25)
The Budget 2023 brought about changes in the presumptive taxation limits under Section 44AD and Section 44ADA. These changes are aimed at providing relief to small businesses and professionals by increasing the thresholds for turnover and income, respectively. However, these revised limits are subject to a condition regarding the mode of receipts. Let’s take a look at the revised limits.
Important Notes: The below-revised limits are only applicable to A.Y.2024-25
|Category||Previous Limits||Revised Limits|
|Sec 44AD||Rs. 2 crore||Rs. 3 crore*|
|Sec 44ADA||Rs. 50 lakh||Rs. 75 lakh*|
What is Section 44ADA?
The presumptive scheme introduced by Section 44ADA of the Income-tax Act provides relief to eligible individuals and partnership firms engaged in specified professions. These professions include legal, medical, engineering, architectural, accountancy, technical consultancy, interior decoration, and any other profession as notified by the Central Board of Direct Taxes (CBDT).
- Under the scheme, profits are assumed to be 50% of the gross receipts. However, taxpayers can declare higher income if desired.
- To qualify, gross receipts should not exceed Rs. 50,00,000 (or Rs. 75,00,000 (A.Y.2024-25) if cash receipts are less than 5%).
- No further expenses can be claimed once income is computed at the prescribed rate.
- Advance tax must be paid in full by March 15 of the previous year to avoid interest liabilities.
- Professionals under this scheme are not required to maintain books of account or undergo tax audits.
- If a person opts out of the scheme and declares income at a lower rate, they must maintain books of account and may undergo tax audit if income exceeds the exempted amount.
- The scheme must be followed for at least five consecutive years, or the taxpayer becomes ineligible for the scheme for the next five years.
Eligibility for Section 44ADA
The following types of taxpayers in India are eligible for Section 44ADA.
- Partnership firms (Please note that limited liability partnerships are not eligible)
The following professions are covered under this provision of section 44ADA.
1. Legal professionals (Advocates, Lawyers, Solicitors, etc.)
2. Medical professionals (Doctors, Surgeons, Dentists, etc.)
3. Engineering professionals (Engineers, Consultants, Contractors, etc.)
4. Architectural professionals (Architects, Interior Designers, etc.)
5. Accountancy professionals (Chartered Accountants, Cost Accountants, etc.)
6. Technical consultancy professionals (IT Consultants, Management Consultants, etc.)
7. Interior decoration professionals (Interior Decorators, Designers, etc.)
8. Other professions as notified by the Central Board of Direct Taxes (CBDT) from time to time.
Apart from the specific professions mentioned earlier, here are some other examples of professionals that are covered under Section 44ADA:
1. Financial consultants
2. Graphic designers
3. Event planners
5. Fitness trainers
6. Artists (painters, sculptors, etc.)
7. Writers and authors
8. Musicians and performers
10. Psychologists and therapists
11. Teachers and tutors
14. Software developers and programmers (in certain cases)
15. Social media influencers (in certain cases)
This is not an exhaustive list, and it’s important to refer to the specific notifications issued by the CBDT for a comprehensive and up-to-date list of professions covered under Section 44ADA.
Ineligibility for Section 44ADA
The following scenarios illustrate the ineligibility for availing of the benefits of Section 44ADA:
1. Gross Receipts Exceed Limit: If the total gross receipts from the profession exceed Rs. 50,00,000 (or Rs. 75,00,000 (A.Y. 2024-25) if cash receipts are less than 5% of the total), the taxpayer is not eligible for the presumptive taxation scheme under Section 44ADA.
2. Non-Specified Professions: If the taxpayer’s profession is not among the specified professions listed under Section 44ADA (such as legal, medical, engineering, architectural, accountancy, etc.), they would not qualify for the benefits of this section.
3. Not Following Presumptive Income Calculation: If the taxpayer chooses not to compute their income at the prescribed rate of 50% of the gross receipts and declares a lower income, they would no longer be eligible for the presumptive taxation scheme.
4. Failure to Adhere to Minimum Period: Taxpayers who opt for the presumptive taxation scheme under Section 44ADA must adhere to it for a minimum of five consecutive years. If they fail to do so, they become ineligible for the scheme for the subsequent five years.
How to Calculate Income Under Section 44ADA
Under Section 44ADA of the Income-tax Act, the calculation of presumptive income for eligible professionals is relatively simplified. Here’s how it is determined:
Step 1. Gross Receipts: Start by calculating the total gross receipts from the profession for the financial year.
Step 2. Presumed Income: The presumptive income is considered to be 50% of the total gross receipts. This means that half of the gross receipts are considered as taxable income.
Step 3. Declaration of Income: Taxpayers have the option to declare a higher income if they wish, but the minimum presumed income is 50% of the gross receipts.
Step 4. Expenses: Once the income is computed at the prescribed rate (50%), no further deductions or expenses can be claimed against the income. Only the presumed income is subject to taxation.
Let’s consider an example to illustrate the presumptive income calculation under Section 44ADA:
Suppose Mr. Kumar is a legal professional who qualifies for the presumptive taxation scheme under Section 44ADA. In the financial year A.Y.2023-24, he earned gross receipts of Rs. 10,00,000 from his legal practice.
1. Gross Receipts: Mr. Kumar’s total gross receipts from his legal profession are Rs. 10,00,000.
2. Presumed Income: According to Section 44ADA, the presumed income is 50% of the gross receipts. Therefore, Mr. Kumar’s presumed income will be Rs. 5,00,000 (50% of Rs. 10,00,000).
3. Declaration of Income: Mr. Kumar has the option to declare a higher income if he desires, but in this case, he chooses to stick with the presumed income of Rs. 5,00,000.
4. Expenses: Since Mr. Kumar has opted for the presumptive taxation scheme, he cannot claim any further expenses or deductions against the presumed income of Rs. 5,00,000.
As a result, Mr. Kumar will be liable to pay taxes based on the presumed income of Rs. 5,00,000, regardless of his actual expenses incurred during the financial year. You can calculate the income tax A.Y.2023-24 by using the income tax calculator here.
Benefits of Section 44ADA
1. Simplified Taxation: Professionals covered under Section 44ADA are relieved from the burden of maintaining detailed books of accounts. They can declare their income based on a prescribed percentage of their gross receipts, eliminating the need for complex accounting procedures.
2. Reduced Compliance: Professionals availing the benefits of Section 44ADA are not required to undergo a tax audit. This provision significantly reduces compliance requirements and associated costs. They are only required to undergo an audit if their income from the profession is declared at a rate lower than 50% of the gross receipts or if the income exceeds the basic exemption limit.
3. Presumptive Rate Advantage: The prescribed presumptive rate of 50% allows professionals to declare their income at a lower rate compared to the regular taxation provisions. This can result in lower tax liability for professionals, enabling them to effectively plan their tax obligations.
Limitations and Conditions
Here are the limitations and conditions associated with Section 44ADA:
1. Gross Receipts Limit: To be eligible for the presumptive taxation scheme under Section 44ADA, the total gross receipts from the profession should not exceed Rs. 50,00,000 in a financial year. However, if cash receipts are less than 5% of the total receipts, the limit is extended to Rs. 75,00,000 (A.Y.2024-25).
2. Presumptive Income Calculation: The income is computed on a presumptive basis at 50% of the total gross receipts. Taxpayers have the option to declare a higher income if desired, but they cannot claim further expenses once the income is computed at the prescribed rate.
3. Advance Tax Payment: Taxpayers opting for the presumptive taxation scheme under Section 44ADA are required to pay the entire amount of advance tax by March 15 of the previous year. Failure to meet this requirement may result in interest liabilities under Section 234C.
4. Maintenance of Books of Account: Individuals engaged in specified professions who have opted for the presumptive taxation scheme are not obligated to maintain books of account under Section 44AA. However, if a taxpayer decides to declare their income at a lower rate (less than 50%), they would be required to maintain books of account.
5. Tax Audit Requirement: Taxpayers under Section 44ADA are exempted from tax audit under Section 44AB. However, if a person opts out of the presumptive taxation scheme and declares their income below 50% of gross receipts, they may be subject to tax audit provisions under Section 44AB if their income exceeds the maximum amount not chargeable to tax.
6. Minimum Period of Scheme: Taxpayers must adhere to the scheme for a minimum of five consecutive years. Failure to do so would render the taxpayer ineligible for the presumptive taxation scheme for the subsequent five years.
Comparison Between 44ADA vs. 44AD vs 44AE
The following is a comparison of the provisions of sections 44AD, 44ADA, and 44AE of the Income-tax Act.
|Provisions||Section 44AD||Section 44ADA||Section 44AE|
|Applicability||Small taxpayers engaged in any business||Small taxpayers engaged in specified professions||Taxpayers engaged in the business of goods carriage|
|Eligible Taxpayers||Resident Individual||Individual and Partnership Firm (except LLP)||Individuals and HUFs|
|Turnover/Gross Receipts||Up to Rs. 2,00,00,000 (or Rs. 3,00,00,000 (A.Y. 2024-25) with 5% cash limit)||Up to Rs. 50,00,000 (or Rs. 75,00,000 (A.Y.2024-25) with 5% cash limit)||N/A|
|Presumptive Rate||8% of turnover||50% of gross receipts||Presumptive income calculated based on the tonnage of the vehicle|
|Maintenance of Books||Not required||Not required||Not required|
|Tax Audit Requirement||Not required||Not required||Not required|
|Deductions||No further deductions allowed||No further deductions allowed||No further deductions allowed|
|Depreciation||Not available||Written down value calculation as per section 32||Not available|
|Advance Tax Payment||Due on or before 15th March||Due on or before 15th March||N/A|
|Opting out of the Scheme||Can opt out anytime, but not eligible for the next 5 years||Can opt out anytime, but not eligible for the next 5 years||N/A|
|Tax Audit Requirement after opting out||Required||Required||N/A|
Section 44ADA provides a simplified tax regime for professionals, reducing their compliance burden and offering certain tax advantages. By opting for the presumptive taxation scheme, eligible professionals can streamline their tax filing process and focus more on their core professional activities.
FAQ on Section 44ADA
Q. I am a professional photographer, can I claim my income under section 44ADA or section 44AD of the Income Tax Act?”
A professional photographer can claim income under section 44ADA of the Income Tax Act. Section 44ADA is specifically designed for professionals, including photographers, who are engaged in specified professions.
Under section 44ADA, a professional photographer can opt for the presumptive taxation scheme, whereby income is computed on a presumptive basis at 50% of the total gross receipts of the profession. The income declared at 50% is considered the final income, and no further deductions for expenses are allowed. However, the written down value of any asset used in the profession can be calculated as if depreciation under section 32 has been claimed and allowed.
Therefore, a professional photographer should choose section 44ADA for declaring income under the presumptive taxation scheme.
Q. Which Income Tax Return (ITR) form should I use if I am opting for the presumptive taxation scheme under section 44ADA?
For individuals opting for the presumptive taxation scheme under section 44ADA of the Income Tax Act, 1961, the applicable Income Tax Return (ITR) form is ITR-4.
ITR-4, also known as “Sugam,” is the form specifically designed for individuals, Hindu Undivided Families (HUFs), and partnerships who have opted for presumptive taxation under section 44AD or section 44ADA.
Q.Can I claim benefits under both section 44AD and section 44ADA of the Income Tax Act if I am a doctor who is engaged in medical practice and also running a pharmacy business?
As per Section 44AD(6) of the Income Tax Act, a person engaged in a profession is not eligible to avail the benefits under Section 44AD, regardless of whether they are also carrying on a business. Therefore, if you have both contract income and professional income, you cannot file your income tax return under both sections 44AD and 44ADA. However, let’s explore sections 44AD and 44ADA to check if it is wrong or right.
The simultaneous use of sections 44AD and 44ADA under the Income Tax Act has been a topic of confusion and debate, particularly for professionals such as doctors who are engaged in both their practice and other business activities like running a pharmacy.
In favor of the doctor (using both sections): The doctor can argue the following points in favor of using both sections:
1. Absence of explicit prohibition: Nowhere in the Income Tax Act is it explicitly stated that a person who opts to pay tax under section 44ADA cannot simultaneously opt for section 44AD. Since there is no specific restriction, the doctor can claim that they should be allowed to avail the benefits of both sections.
2. Beneficial provisions for small taxpayers: Section 44AD and section 44ADA were introduced to provide relief to small taxpayers. By utilizing both sections, the doctor can argue that they are maximizing the benefits available to them as a small taxpayer.
3. Ensuring full utilization of the scheme: If the doctor decides to show their profit under section 44ADA and does not show income from their business under section 44AD, he may argue that they would be nullifying the benefits of availing the scheme. Claiming benefits under both sections would enable them to fully utilize the intended advantages of the provisions.
In favor of the Income Tax Department (using section 44ADA only):
The Income Tax Department can present the following arguments against using both sections simultaneously:
1. Section 44AD(6) restriction: Section 44AD(6) explicitly states that a person engaged in a profession is ineligible to avail the benefits under section 44AD, irrespective of whether they are also carrying on a business. The department can argue that this provision clearly restricts professionals from utilizing section 44AD.
2. Preventing exploitation of provisions: The department’s standpoint is that section 44AD and section 44ADA were introduced to benefit specific categories of taxpayers (businesses and professionals, respectively). Allowing taxpayers to claim benefits under both sections would defeat the purpose of separate provisions and potentially lead to the exploitation of these provisions for undue advantages.
3. Total turnover limit: If both sections are used together, the total turnover limit would be Rs. 2.5 crores (Rs. 2 crores under section 44AD and Rs. 50 lakhs under section 44ADA). The department can argue that taxpayers should not be able to circumvent the intended spirit of the provisions by combining them to avail higher turnover limits.
It’s important to note that while there may be differing opinions among tax professionals on this matter, the final interpretation and application of the Income Tax Act are determined by the tax authorities.
Q. I am earning from the Google AdSense program through my website and YouTube. Which section, 44ADA or 44AD, is applicable to me?
Since AdSense earnings from YouTube and blogs are generally considered as business income rather than professional income, the provisions of Section 44AD would be applicable.