Section 44ADA of Income Tax Act – Presumption Taxation Scheme

Last Updated at: December 23, 2019
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All you need to know about Section 44ADA of Income Tax Act

Self-employed professionals whose income (total gross receipts) is below Rs.50 lakhs in a financial year is the beneficiary of Section 44ADA of the Income Tax Act. That person can be employed in varied professions such as engineering, legal, medicine, architecture, accountancy, interior decoration and technical consulting. 

Now you want to know what are the benefits? What is unique in Section 44ADA of the Income-tax Act? Let’s find out. 

However, under Section 44ADA, small taxpayers do not have any need to maintain the account books and they can calculate profits as a percentage of the total sales made in a financial year. The major objective of this Act are –

  1. Simplifying the system of tax for self-employed professionals.
  2. Easing out the tax compliance burden on self-employed professionals.
  3. Easing out the process of doing business.
  4. Establishing parity between those who fall under Section 44ADA and those who don’t fall under this Act.

As per the Income Tax Act, the presumptive taxation scheme adopts to ease the burden of a person who engages himself in businesses or profession from the tedious job of maintaining a regular book of accounts and relieves to audit accounts. Indeed it permits one to calculate your tax on an estimated income or profit.

Who are all eligible under Section 44ADA?

  1.     Resident Individual
  2.     Resident Hindu Undivided Family (HUF)
  3.     Partnership Firms [not Limited Liability Firm (LLP)]

What is the list of professionals eligible for section 44ADA?

Here is the list of the eligible professions in section 44AA(1):

  1. Accountancy
  2. Interior Decoration
  3. Technical consultant
  4. Engineering
  5. Legal
  6. Medical
  7. Architecture
  8. Any other professionals as notified by the Central Board of Direct Tax (CBDT).

Get free legal advice now

Extract of Section 44ADA of the Income Tax Act

Special provision for computing profits and gains of profession on a presumptive basis.

44ADA

(1) Notwithstanding anything contained in sections 28 to 43C, in the case of an assessee, being a resident in India, who is engaged in a profession referred to in sub-section (1) of section 44AA and whose total gross receipts do not exceed fifty lakh rupees in a previous year, a sum equal to fifty per cent of the total gross receipts of the assessee in the previous year on account of such profession or, as the case may be, a sum higher than the aforesaid sum claimed to have been earned by the assessee, shall be deemed to be the profits and gains of such profession chargeable to tax under the head “Profits and gains of business or profession”.

(2) Any deduction allowable under the provisions of sections 30 to 38 shall, for subsection (1), be deemed to have been already given full effect to and no further deduction under those sections shall be allowed.

(3) The written down value of any asset used for profession shall be deemed to have been calculated as if the assessee had claimed and had been actually allowed the deduction in respect of the depreciation for each of the relevant assessment years.

(4) Notwithstanding anything contained in the foregoing provisions of this section, an assessee who claims that his profits and gains from the profession are lower than the profits and gains specified in sub-section (1) and whose total income exceeds the maximum amount which is not chargeable to income-tax, shall be required to keep and maintain such books of account and other documents as required under subsection (1) of section 44AA and get them audited and furnish a report of such audit as required under section 44AB.

How to calculate taxable income for a person adopting the presumptive taxation scheme u/s 44ADA?

If a professional adopts for presumptive taxation under section 44ADA, his/her income will be not be calculated in a normal manner instead it is calculated on a presumptive basis at 50% of gross receipts of the profession.

The person adopting taxation under this section can also declare income higher than 50% of the total gross receipts. And, a person who adopts the presumptive taxation scheme is not allowed to claim further deduction after declaring income at 50%.

However, a professional can claim deductions allowed under various sections of chapter VI A. Though the separate deduction on depreciation is not allowed while calculating income under section 44ADA, the written down value (WDV) of any asset used in such business shall be calculated each financial year.

The written down value is the value of the asset which mentions the filing tax in a case when the asset will be sold late by the assessee.

Payment of Advance Tax for the specified professions under Section 44ADA:

If a person from a specific profession mentioned under section 44AA(1) opting for a presumptive taxation scheme u/s 44ADA is liable to settle the full amount of advance tax on or before the 15th of March of the previous year.

If he or she fails to pay interest as per section 234B and 234C.

Maintenance of books of accounts as per section 44ADA:

Section 44AA of the Income-tax Act deals with the maintenance of books of accounts by a person engaged in business or profession.

In case a person opting for the presumptive taxation scheme under Section 44ADA and declares income at 50% of gross receipt, then he doesn’t need to maintain books of account in respect to a specific provision under Section 44AA.

And, therefore, not required to get their accounts audited under Section 44AB.

Conditions to audit accounts and to maintain books of account:

If a person meets the following criteria, then he/she must maintain books of accounts under Section 44AA and get accounts audited under Section 44AB

  1. Declaring income from a profession at less than 50% under Section 44ADA.
  2. The total income of an assessee is more than the exemption limit prescribed by CBDT.
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Section 44ADA of Income Tax Act – Presumption Taxation Scheme

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Self-employed professionals whose income (total gross receipts) is below Rs.50 lakhs in a financial year is the beneficiary of Section 44ADA of the Income Tax Act. That person can be employed in varied professions such as engineering, legal, medicine, architecture, accountancy, interior decoration and technical consulting. 

Now you want to know what are the benefits? What is unique in Section 44ADA of the Income-tax Act? Let’s find out. 

However, under Section 44ADA, small taxpayers do not have any need to maintain the account books and they can calculate profits as a percentage of the total sales made in a financial year. The major objective of this Act are –

  1. Simplifying the system of tax for self-employed professionals.
  2. Easing out the tax compliance burden on self-employed professionals.
  3. Easing out the process of doing business.
  4. Establishing parity between those who fall under Section 44ADA and those who don’t fall under this Act.

As per the Income Tax Act, the presumptive taxation scheme adopts to ease the burden of a person who engages himself in businesses or profession from the tedious job of maintaining a regular book of accounts and relieves to audit accounts. Indeed it permits one to calculate your tax on an estimated income or profit.

Who are all eligible under Section 44ADA?

  1.     Resident Individual
  2.     Resident Hindu Undivided Family (HUF)
  3.     Partnership Firms [not Limited Liability Firm (LLP)]

What is the list of professionals eligible for section 44ADA?

Here is the list of the eligible professions in section 44AA(1):

  1. Accountancy
  2. Interior Decoration
  3. Technical consultant
  4. Engineering
  5. Legal
  6. Medical
  7. Architecture
  8. Any other professionals as notified by the Central Board of Direct Tax (CBDT).

Get free legal advice now

Extract of Section 44ADA of the Income Tax Act

Special provision for computing profits and gains of profession on a presumptive basis.

44ADA

(1) Notwithstanding anything contained in sections 28 to 43C, in the case of an assessee, being a resident in India, who is engaged in a profession referred to in sub-section (1) of section 44AA and whose total gross receipts do not exceed fifty lakh rupees in a previous year, a sum equal to fifty per cent of the total gross receipts of the assessee in the previous year on account of such profession or, as the case may be, a sum higher than the aforesaid sum claimed to have been earned by the assessee, shall be deemed to be the profits and gains of such profession chargeable to tax under the head “Profits and gains of business or profession”.

(2) Any deduction allowable under the provisions of sections 30 to 38 shall, for subsection (1), be deemed to have been already given full effect to and no further deduction under those sections shall be allowed.

(3) The written down value of any asset used for profession shall be deemed to have been calculated as if the assessee had claimed and had been actually allowed the deduction in respect of the depreciation for each of the relevant assessment years.

(4) Notwithstanding anything contained in the foregoing provisions of this section, an assessee who claims that his profits and gains from the profession are lower than the profits and gains specified in sub-section (1) and whose total income exceeds the maximum amount which is not chargeable to income-tax, shall be required to keep and maintain such books of account and other documents as required under subsection (1) of section 44AA and get them audited and furnish a report of such audit as required under section 44AB.

How to calculate taxable income for a person adopting the presumptive taxation scheme u/s 44ADA?

If a professional adopts for presumptive taxation under section 44ADA, his/her income will be not be calculated in a normal manner instead it is calculated on a presumptive basis at 50% of gross receipts of the profession.

The person adopting taxation under this section can also declare income higher than 50% of the total gross receipts. And, a person who adopts the presumptive taxation scheme is not allowed to claim further deduction after declaring income at 50%.

However, a professional can claim deductions allowed under various sections of chapter VI A. Though the separate deduction on depreciation is not allowed while calculating income under section 44ADA, the written down value (WDV) of any asset used in such business shall be calculated each financial year.

The written down value is the value of the asset which mentions the filing tax in a case when the asset will be sold late by the assessee.

Payment of Advance Tax for the specified professions under Section 44ADA:

If a person from a specific profession mentioned under section 44AA(1) opting for a presumptive taxation scheme u/s 44ADA is liable to settle the full amount of advance tax on or before the 15th of March of the previous year.

If he or she fails to pay interest as per section 234B and 234C.

Maintenance of books of accounts as per section 44ADA:

Section 44AA of the Income-tax Act deals with the maintenance of books of accounts by a person engaged in business or profession.

In case a person opting for the presumptive taxation scheme under Section 44ADA and declares income at 50% of gross receipt, then he doesn’t need to maintain books of account in respect to a specific provision under Section 44AA.

And, therefore, not required to get their accounts audited under Section 44AB.

Conditions to audit accounts and to maintain books of account:

If a person meets the following criteria, then he/she must maintain books of accounts under Section 44AA and get accounts audited under Section 44AB

  1. Declaring income from a profession at less than 50% under Section 44ADA.
  2. The total income of an assessee is more than the exemption limit prescribed by CBDT.
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