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Section 44ADA of Income Tax Act

Updated on June 22, 2022 , 4564 views

In the financial year 2016-2017, the government of India introduced a scheme for Presumptive Taxation.under section 44ADA. This section is a simple method of taxation for small professionals. The benefits under this section can be availed by those professionals whose annual gross receipts are below Rs. 50 lakhs.

Section 44ADA

Note that Section 44ADA offers a scheme of presumptive taxation of profits and gains arising from professions that are mentioned under Section 44AA(1) of the income tax Act of 1961.

What is Section 44ADA?

Section 44ADA is a provision in order to calculate the profits and gains of small professionals. This was introduced to extend the scheme of simplified presumptive taxation to professionals. Previously, this tax scheme was applicable to small businesses.

The scheme helps reduce the compliance burden on small professions and eases doing business. Profits are presumed to be 50% of the gross receipts under this tax scheme.

Objectives of Section 44ADA

Mentioned below are the objectives of Section 44ADA under the Presumptive Taxation Scheme:

  1. Tax System- One of the main objectives of the section is to simplify the tax system.

  2. Compliance- Another objective of the scheme is to reduce the compliance burden of small taxpayers.

  3. Business- Under this section, there will be an ease for small professionals doing business.

  4. Balance- The scheme brings parity between small businessmen and small professionals under Section 44AD.

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Eligibility Under Section 44ADA

Under this section, professionals with total gross receipts less than Rs. 50 lakhs a year are eligible. They include the following:

1. Individual Professionals

Individual professionals above 18 years of age are eligible under this section. These include the following:

  • Interior Decorators
  • Individuals in technical consulting
  • Engineers
  • Accounting Professionals
  • Legal Professionals
  • Medical Professionals
  • Professionals in Architecture
  • Movie Artists (editor, actor, director, music producer, music director, dance director, singer, lyricist, story writer, dialogue writer, costumer designers, cameraman)
  • Other notified professionals

2. Hindu Undivided Families (HUFs)

Members of the Hindu Undivided Families are eligible.

3. Partnership Firms

Partnership firms are eligible. However, note that limited liability partnerships are not eligible.

Benefits of Section 44ADA

The benefits covered in this section are mentioned below:

1. Maintaining Books

One of the major benefits is that there is no need for maintaining books required under Section 44AA.

2. Auditing

There is no requirement of having the accounts audited under Section 44AB.

Important Points About Section 44ADA

After the profits have been taxed under Section 44ADA at 50% of the gross receipts, the other balance of 50% is allowed towards all business expenses of the beneficiary. The business expenses include books, stationery, Depreciation on assets (like a laptop, vehicle, printer), daily expenses, telephone charges, the expenses incurred on taking services from other professionals and more.

The Written Down Value (WDV) of assets for the purpose of tax will be calculated as the depreciation that is allowed each year. Note that WDV is the value of the asset for the purpose of tax in case the asset is later sold by the beneficiary.

Example of Section 44ADA

Understanding Section 44ADA includes the fact the presumptive Income is considered. The higher of 50% of the total receipts from the profession and income offered by the beneficiary from the profession will be considered.

For instance, Subhash is a movie director. He is in the business of making short films, which have been lauded on several occasions. Simultaneously, he is usually working on multiple projects. His total receipts for the financial year 2019-2020 are Rs. 40 lakhs. His annual expenses are Rs. 10 lakhs toward office expenses like rent, telephone charges, travelling, etc.

Let's make a comparison between his Taxable Income under normal provisions and the presumptive tax scheme:

Normal Tax Scheme

Details Description
Gross Receipts Rs. 40 lakhs
Expenses Rs. 10 lakhs
Net Profit Rs. 30 lakhs

Presumptive Tax Scheme

Details Description
Gross Receipts Rs. 30 lakhs
Less: 50% deemed expenses Rs. 15 Lakhs
Net Profit Rs. 25 Lakhs

Considering the example above, the net profit under the presumptive income scheme is lower than the normal provisions. It is thus beneficial for Subhash to offer his income under the presumptive scheme of taxation under Section 44ADA.

Conclusion

Section 44ADA is beneficial for small businesses people and professionals to save on their income tax and also conduct business with much ease.

Disclaimer:
All efforts have been made to ensure the information provided here is accurate. However, no guarantees are made regarding correctness of data. Please verify with scheme information document before making any investment.
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