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Who Can Opt for the Presumptive Taxation Scheme under Section 44ADA?

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Who Can Opt for the Presumptive Taxation Scheme under Section 44ADA?
August 03, 2021

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All pay our taxes and file income tax returns based on our annual income. For salaried people, understand the tax structure is simple. For many professionals, working out profits and the amount of tax they have to pay is much harder. To help these professionals, the Income Tax department decided to offer an income tax scheme known as presumptive income tax. Here, you calculate your tax on an estimated income or profit. The process involves using a few indirect methods to compute your tax liability. So, your taxable income gets calculated based on assumptions instead of on actuals. If you opt for the presumptive tax scheme, you must declare a specified percentage of gross receipts as your professional income. You then have to pay a fixed percentage of that amount as tax.

What Is the Presumptive Taxation Scheme for Professionals?

Initially, only businesses could use presumptive taxation. Now, under Section 44ADA of the Income Tax Act, even professionals can avail of the presumptive tax scheme as well. The scheme is only applicable to individuals who earn less than INR 50 lakhs per annum. To benefit under the scheme, an individual’s income is calculated as only 50% of gross receipts. They are then taxed accordingly.

For some professionals, their net profits work out to less than 50% of receipts. In this case, the professional can work with a percentage that is less than the standard 50% of receipts. If you opt to do this, you need to maintain your accounts properly. You must ask a Chartered Accountant to audit your accounts. If your professional income is less than the base amount of INR 2.5 lakhs per annum, you do not have to go through a complete audit.

Who Can Avail the Presumptive Tax Scheme?

As per guidelines outlined in Section 44ADA, Indian residents and those involved in partnership firms, except Limited Liability Partnerships (LLP), can opt for the presumptive taxation scheme. Medical professionals, company secretaries, engineers, IT professionals, technical consultants, lawyers, accountants, interior decorators, and architects can file for presumptive tax. It’s important to remember that this scheme is only available to those individuals who earn less than INR 50 lakhs in a single financial year.

Maintaining Books and Accounts to Avail the Income Tax Scheme

If you are eligible for the presumptive tax scheme and choose to file your returns as such, you do not have to maintain proper books for the financial year. You do not have to keep a record of the expense vouchers either. But, if you are registered under the Goods and Service Tax (GST) Act, you must continue to maintain your records and preserve all require documents.

What Happens When Actual Profits Cross 50%?

Ideally, you should accurately represent your net receipts and profits. If your profits are more than 50% of total receipts, you should showcase your income accordingly. Since you do not have to maintain accurate books under the presumptive tax scheme, the Income Tax Department cannot check your profits and receipts. But, based on your purchases and any tax-saving investments you make, they can accurately estimate your overall income. So, before you decide to opt for the minimum of just 50% of receipts, have a look at your overall expenditure and file your taxes accordingly.

Can I Change My Mind Later?

As a professional, you can decide whether you want to file under the presumptive tax scheme or not every financial year. So, you can try it for a few years. If you are not happy, you can switch to other tax schemes the following year.

Over the years, the process of paying taxes and filing returns has become much easier. Under the presumptive taxation scheme, professionals gain some freedom from maintaining accurate books of account – especially when they’re just starting work. While the taxation scheme is built to help you, it’s crucial that you do not try and take advantage of it.

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Francis Rodrigues Francis Rodrigues

Francis Rodrigues has a decade long experience in the insurance sector, and as SVP, E-Commerce and Digital Marketing, HDFC Life, manages the online sales channel, as well as digital and performance marketing. He has had hands-on experience in setting up sales channels and functional teams from scratch over a career spanning 2 decades.

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Vishal Subharwal heads the Strategy, Marketing, E-Commerce, Digital Business & Sustainability initiatives at HDFC Life. He is responsible for crafting and ensuring successful implementation of the overall organisation strategy.

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