Presumptive Tax: Ways to file returns & save taxes, explained in detail

What is Presumptive Tax for Professionals?

Presumptive Taxation, in layman’s terms, means the tax that is computed on the presumed income. The process is quite straightforward to understand; the government prescribes a certain tax rate, and an individual then applies this rate to his gross receipts to calculate his/her net income.

The Presumptive taxation scheme was first introduced in the year 1995-96, under section 44AD of the Income Tax Act. There are currently three sections under this scheme; i.e. Section 44AD, Section 44AE and, Section 44ADA. Generally, small businessmen and professionals are asked for mandatory maintenance of their books of accounts under Section 44AA, in order to disclose their accounting records to the tax authorities in the future, if required. In addition, a tax audit is needed under section 44AB. Therefore, the motive behind this scheme was to make the laborious and intricate tax-related work smooth for business owners and professionals.

The scheme is designed according to the following sections;

Section 44AD: Only an Indian resident, a Hindu Undivided Family, and a partnership firm (not LLP) is eligible to adopt this scheme
Section 44AE: The provisions under this section are applicable to individuals involved in the business of hiring or leasing of goods carriages (for example, truck business).
Section 44ADA: This section deals with the professional income. An Indian resident who is engaged in the professional services, such as, accountancy, consultancy, legal, medical, interior decoration, engineering, film artist, or any other profession specified by Central Board of Direct Taxes (CBDT), is allowed to choose this scheme.

In this article, we will be discussing Section 44ADA, thus, focusing on the individuals that can benefit from the presumptive taxation scheme.

Section 44ADA – For Professionals

The presumptive taxation scheme under Section 44ADA was added to the Income Tax Act, 1961, in the year 2017. The provisions under Section 44ADA are easy to apply and are less arduous. Thus, if you provide any professional service, work as a freelancer or are an advisor, you will be allowed to pay the income tax on only 50% of your gross receipts. However, to use this provision, a limit is set for the total annual income, it should be below INR 50 lakhs. For a clear understanding of the above concept, let’s look at the example given below.

Mr. X, a well-renowned doctor, hasan annual income of INR 30 lakhs. To calculate the taxable income, he opts for the presumptive taxation scheme under Section 44ADA. Hence, his presumed taxable income amounts to INR 15 lakhs, i.e. 50% of 30 lakhs. No tax audit is required here.

Suppose, if Mr. X was unaware of this scheme, in that case, his taxable income after allowing various deductions, say INR 10 lakhs, would be INR 20 lakhs (30 lakhs – 10 lakhs). After considering both the scenarios, it’s visible that availing presumptive tax scheme helped Mr. X to save the tax on INR 10 lakhs.

Further, let’s say if Mr. X's annual gross receipt is INR 60 lakhs, in that case, section 44ADA is not applicable, which means that he would not be eligible to avail the benefits of presumptive taxation. As per Section 44AB of the Income Tax Act, a tax audit will become mandatory in this case, implying that Mr. X would also need to maintain books of accounts.

How is the income received from abroad treated?

If you are a creative professional working for someone outside India, in that case, your income will be taxable if you are receiving that income in India and you are an Indian resident.

What happens if you declare profits less than 50% of the gross receipts?

We discussed that for opting presumptive taxation scheme, the minimum percentage of the profit to be disclosed should be 50%. Suppose if a person declares profits less than 50% of the gross receipts. There is a possibility of two different outcomes in such cases.

Case 1:

Mr. X’s annual gross receipt is INR 10 lakhs, and he shows the profit of INR 4 lakhs as per books of accounts. The INR 4 lakhs is his PGBP income, which will also be considered as his GTI (Gross total income). Now after applying deductions under Sections 80C, say INR 150,000, his total income would be INR 250,000. In this case, Mr. X is disclosing the profit percentage of 40%, instead of 50%. However, here section 44AA and Section 44AB will not be applicable. Even if Mr. X defaults in disclosing the profit, no tax audits will be required. This is because the total income, i.e. INR 250,000, does not exceed the basic exemption limit.

Case 2:

Mr. X declares income lower than 50% of the gross receipts, i.e. 40% in this case. His gross receipts are 10 lakhs. After applying tax deductions under Section 80C, say INR 120,000, the total income amounts to INR 280,000. So, is he required to maintain books of accounts and get the tax audit done, which is mandatory under Section 44AA and 44AB respectively? In this scenario, the answer is yes, because total income, i.e. INR 280,000, has exceeded the basic exemption limit, which is set at INR 250,000. In other words, total income should be more than INR 250,000 for the application of Section 44AA and 44AB.

Benefits

Smooth Tax-filing process: ITR -4 form is to be filled by the taxpayers who have opted for the presumptive taxation scheme under section 44ADA, 44DA or section 44AE. The form filing under ITR-4 is straightforward and less time consuming when compared to other ITR forms.
Money Saving: Since the tax filing process is easy and less laborious under this scheme, many professionals prefer to fill the ITR form on their own instead of hiring tax consultants who charge around INR 5000 to INR 15000 for filing the tax returns.
Tax Saving: As witnessed in the aforementioned example, this scheme helps in tax saving. Professionals usually do not incur huge expenses, and by disclosing 50% of the earnings as profits, they can save the taxes easily.

What happens when you have a job, but you also freelance?

The individuals who earn a fixed amount of salary and also work as a freelancer (for example, photographers, part-time models etc.), their gross receipts would include both the salary as well as the income generated from the freelance work. The total gross receipts would be liable for taxation. For example, Mr. Y, a financial analyst, receives a salary of INR 10 lakhs per annum; however, during weekends, he works as a photographer and earns INR 5 lakhs annually. In this case, his total income would be INR 1250,000, ergo, only 50% of his earnings generated from freelance work will be added to his total income.

Some other facts to be noted

No other deductions are allowed under presumptive income. All the deductions under Section 30 to 38 will be considered allowed. Even the depreciation will be deemed to be allowed. Please note that the advance tax provisions will be applicable; however, only one instalment would be required for payment during each financial year, on or before 15th march. Normally, there are four instalments to be paid for the advance tax, but individuals who are covered under section 44AD and 44ADA are required to pay only one instalment. Professionals who have opted for this scheme can opt out any time, unlike other tax provisions. After the amendment of the Finance Act in 2016, provisions related to partnership firms regarding remuneration and interest to be paid to partners were removed. Thus, remuneration and interest to partners are not allowed under Section 44AD and Section 44ADA.

Not everyone is familiar with the Income Tax law, as there are numerous sections and subsections. Besides, we usually don’t have enough time to go through all these detailed sections, and even if time is not an issue, it’s surely not easy to remember or memorise each and every law or provision. After learning about all the aspects of this scheme, professionals surely would want to opt for this scheme, and why not? However, please note that most of the finance experts recommend that professionals with low net profits and high expenditure should avoid choosing this scheme. Otherwise, given its trouble-free and straightforward nature, this scheme definitely makes the taxation work easier for the taxpayers covered under Section 44ADA, along with 44AD and 44AE.

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