Everything You Need to Know About Section 44ADA: Presumptive Tax Scheme for Professionals

Everything You Need to Know About Section 44ADA:  Presumptive Tax Scheme for Professionals
Everything You Need to Know About Section 44ADA: 
Presumptive Tax Scheme for Professionals
Section 44 ADA of the Income Tax Act is a new section inserted under the presumptive taxation 
scheme, which was implemented on April 1, 2017, in the Income Tax Act. It was created to assist 
small businesses and professionals in implementing a simplified taxation system with less compliance 
burden. Section 44AE and section 44AD, which were adopted earlier, are two further sections within 
the presumptive taxation structure. 
Profits can be declared as a percentage of total turnover (sales) or gross receipts under presumptive 
taxation schemes. These disclosed gains are considered the assessee’s business income. A taxpayer 
who has chosen the programme is not required to keep full books of accounts. Similarly, small 
taxpayers are not required to keep books of accounts under Section 44ADA, and profits are 
determined as a percentage of total sales. 
Goals and Eligibility Criteria
Some of the key goals of Section 44 ADA under the Presumptive Taxation Scheme are as follows: 
  • To simplify the understanding of the tax system To ease the strain of compliance 
  • To help small business owners understand complex issues 
  • To achieve parity between small businessmen (as defined by Section 44AD) and small professionals. 
Individuals, Hindu undivided families (HUFs), and Partnership firms are all eligible for the Section 
44ADA. Limited-liability corporations (LLCs) are ineligible. Also, eligible beneficiaries are professionals 
listed under Section 44AA of the Income Tax Act, 1961, with total gross income of less than Rs 50 
lakh per year. The professionals listed below are eligible for the Presumptive Taxation Scheme under 
Section 44ADA: 
  • Engineer, Lawyer, Architect, Accountant, Medical Technologist, and Interior Business Consultant 
  • Other professions who have been notified include authorised agents, film artists, some sports related individuals, company secretaries, and information technology experts. 
Awareness Regarding the Section
Taxpayers should be aware that the presumptive taxation option is only available to residents who 
are individuals, HUFs, or partnerships, not to Limited Liability Partnership Firms or corporations. 
Unlike firms that have selected for the programme under Section AD, professionals under Section 
ADA have the ability to opt-in and out at any time. Professionals are exempt from the five-year ban. 
Under this clause, a professional’s income is deemed to be half of their entire gross receipts for the 
year, as they normally assume they don’t have many expenses. Professionals participating in this 
programme are not required to keep books of accounts.  
If their income is less than 50% of total gross revenues and their total income exceeds the basic 
exemption ceiling, they cannot be classified under Section 44ADA. They must keep books of accounts 
in accordance with Section 44AA and have them audited in accordance with Section 44AB in this 
circumstance. 
In certain circumstances, Section 44ADA is a unique provision for estimating the profits and gains of 
small professions. Section 44ADA was enacted to broaden the scope of the streamlined presumptive 
taxation regime to include certain professionals. Previously, the presumptive tax method was only 
applied to small businesses. 
Benefits and Exceptions
The presumptive taxation approach decreases compliance costs for small businesses and makes 
doing business easier. Profits are presumed to be 50% of gross receipts under the presumptive 
taxation regime. 
An assessee would receive the following benefits if he or she followed Section 44ADA: 
 
  • Section 44AA does not necessitate the keeping of books. 
  • Under Section 44AB, there is no duty to have your finances audited. 
If an assessee meets the following requirements, he or she is required to keep books and have their 
accounts audited under section 44AB: 
 
  • The profession’s income is offered at a lower percentage than 50% of total receipts. 
  • The assessee’s total income exceeds the basic exemption. 
The Aftermath
All business cost deductions are presumed to have been approved. When earnings are taxed at 50% 
of gross receipts, the remaining 50% is deemed to be deductible against all of the assessee’s business 
expenditures. 
Consumables, the cost of services obtained from another professional, daily costs, books, stationery, 
phone charges, depreciation on assets (laptop, vehicle, printer, etc.) and any other expense incurred 
to carry on the profession are all examples of business expenses. 
For tax purposes, the written down value (WDV) of assets is computed based on the amount of 
depreciation allowed each year. In the event that the asset is eventually sold by the assessee, this 
WDV will be the value of the asset for tax purposes. 

1)  What does the term “presumptive taxation” mean?

Under certain conditions, a person engaged in business is required to keep regular books of account under section 44AA of the Income-tax Act, 1961. The Income-tax Act has created the presumptive taxation plan under sections 44AD and 44AE to relieve small taxpayers from this laborious work.

An individual who uses the presumptive taxation scheme can declare income at a predetermined rate and so avoid the time-consuming task of keeping books of account.

2) Is it possible for an insurance agent to use Section 44AD’s presumptive taxation scheme?

A person who earns commission or brokerage income is not eligible to use section 44D’s presumptive taxation scheme. Because insurance agents receive money through commissions, they are unable to use section 44D’s presumptive taxation structure.

3) Is it possible for a person who practises a profession as defined by section 44AA(1) to use the presumptive taxation scheme of section 44AD?

A person who is engaged in any of the professions listed in section 44AA(1) is not eligible to use the section 44AD presumptive taxation scheme.

He can, however, choose the presumptive taxation plan under section 44ADA and declare 50% of his gross earnings as presumptive income. Only resident assessees with total gross earnings of professions of less than fifty lakh rupees are eligible for the Presumptive Scheme under section 44ADA.

4) Is it possible for a person whose total turnover or gross earnings for the year exceed Rs. 2,00,00,000 to use Section 44AD’s presumptive taxation scheme?

If the total turnover or gross earnings from the firm do not exceed the maximum provided under section 44AB, the eligible per sons might choose the presumptive taxation system of section 44AD (i.e., Rs. 2,00,00,000). In other words, if a business’s total sales or gross receipts exceed Rs. 2,00,00,000, the section 44AD plan cannot be used. ​

5)  What is the procedure for calculating taxable business income under the standard provisions of the Income-tax Law, i.e., if a person does not use Section 44AD’s presumptive taxation scheme?

According to the Income-tax Law, every person’s taxable business income is computed as follows: For the purpose of computing taxable business income in the above manner, taxpayers must keep business books of account, and income will be computed based on the information revealed in the books of account.

6) What is the method for calculating taxable business income if a person uses Section 44AD’s presumptive taxation scheme?

If a person adopts the requirements of section 44AD, income will be determined on a presumptive basis, i.e., at 8% of the qualified business’s turnover or gross revenues for the year.

In other words, if a person adopts the requirements of section 44AD, income will be determined at 8% of turnover rather than the standard method stated in the previous FAQ (i.e., Turnover less Expense). If the real income is greater than 8%, a higher rate of income, i.e., more than 8%, can be stated. ​

7) Is a person obligated to pay advance tax on revenue from a business covered by section 44AD if he uses the presumptive taxation scheme of section 44AD?

Anyone who chooses the presumptive taxation plan under section 44AD must pay the entire amount of advance tax by March 15th of the previous year. If he does not pay the advance tax by the 15th of March of the preceding year, he is subject to interest under section 234C.

8)What happens if a person who is eligible for the section 44AD presumptive taxation scheme declares his income at a lower rate (i.e., less than 8%)?

A person can disclose income at a lower rate (i.e., less than 8%), but if he does and his income exceeds the maximum amount not subject to tax, he must keep books of account as required by section 44AA and have his accounts audited as required by section 44AB.

9)What is the method for calculating taxable income if a person uses Section 44ADA’s presumptive taxation scheme?

If a person follows the provisions of Section 44ADA, their income will be calculated on a presumptive basis, that is, at 50% of their entire gross receipts. However, such a person can disclose revenue that is greater than 50%.

In other words, if a person follows the provisions of Section 44ADA, his or her income will be calculated at 50% of gross receipts rather than the usual 50%.

10) Can a person that uses Section 44ADA’s presumptive taxation plan deduct any more expenses after declaring profit at 50% of gross receipts?

No, if you use the presumptive taxation plan, you are presumed to have claimed all of your expenses. After declaring profit at 50%, no additional deduction claims are allowed.

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