Individuals are often under a misconception that earnings generated through freelancing activities are exempt from taxation. Likewise, many are unaware that freelancers, professionals, and consultants can pay income tax on half of their gross annual income.
Nonetheless, to enjoy this benefit under the 44ADA income tax, the total income for a freelancer in a financial year should be less than Rs 50 lakh.
What is Section 44ADA?
Section 44ADA of the Income Tax Act computes the gains of small-scale professionals. This section allows you to assume that half of your annual gross receipts are your income, and you pay tax on that amount.
Earlier, this scheme covered only small business owners, but now it is extended to professionals such as doctors, lawyers and engineers.
Significant updates to this section were made in the 2023 budget. For example, if you are a professional, your annual gross receipts don’t exceed ₹75 lakh, and you ensure that 95% of your transactions are digital, you can take advantage of this presumptive taxation scheme.
This is a jump from the previous 44ADA limit of ₹50 lakhs. For small businesses, the turnover limit is revised to ₹3 crores from the previous ₹2 crores.
Section 44ADA provides a manner of taxation for small professionals. It is a special provision for computing the profits and gains of small professionals in specific events.
This section details about Presumptive Taxation for professionals that are designed to account for generated profits and earnings. It must be noted that only revenues generated through specific professions mentioned in Section 44AA(1) qualify under the presumptive tax regime.
Section 44ADA was included in the Income Tax Act as a component of the presumptive tax scheme. This said section does not require taxpayers to maintain accounting books. Also, the profit can be computed as a percentage of the total sales generated in a fiscal year.
Regardless, if income is generated at the rate of less than 50% of the receipt and the assessee’s total income is more than the exemption limit, he/she will be required to maintain accounting books. Also, he/she will have to get the same audited.
Update About Section 44ADA in Budget 2023
The Indian government has revised the presumptive taxation limits under Section 44AD and Section 44ADA for the FY 2023-24 (AY 2024-25) as the following-
Category | Previous Limit | Revised Limit |
Section 44AD – For Small Businesses | Rs 2 crores | Rs 3 crores |
Section 44ADA: For Professionals like doctors, lawyers, engineers, etc. | Rs 50 lakhs | Rs 75 lakhs |
Eligibility Criteria for Presumptive Income Under Section 44ADA
If you are an individual professional, such as a doctor, lawyer, or architect, and your annual gross receipts are less than ₹75 lakh, you are eligible for this scheme.
Your partnership firm (excluding Limited Liability Partnerships) can opt for this scheme if it involves a profession outlined in sub-section (1) of section 44AA, like engineering, accounting or technical consulting.
You are eligible if you are engaged in legal, medical, engineering, architectural, accountancy, technical consultancy, interior decoration or any other profession notified by the Board in the Official Gazette.
Movie artists include editors, directors, producers, actors, music directors, art dance directors, directors, lyricists, camerapersons, singers, screenplay or dialogue writers, story writers and costume designers.
Additionally, authorised representatives who represent someone for pay before any tribunals or authority constituted under law, except employees of the represented person or accountants, are also eligible.
Rate of Presumptive Tax under Section 44ADA
The income covered under Section 44ADA is 50% of the gross earnings from a profession for the given fiscal year. It must be noted that such a figure has been ascertained on the assumption that professionals incur a relatively low expenditure when compared to business owners.
Exemptions Under Section 44ADA
- An eligible individual will be entitled to all deductions under Section 30-38, which includes unabsorbed depreciation or allowances.
- The written down value or WDV of depreciable assets will be calculated again post deduction of allowed depreciation.
Provision for Salaried Individuals Under the Presumptive Tax Regime
Often salaried individuals with a regular job choose to freelance for generating extra income. In such circumstances, the salary income is added with the earnings generated from freelancing activities to ascertain the gross income accrued in a financial year. It must be noted that the total will be liable for taxation as per their applicable tax slab rate.
For example, if Shruti’s salary income is Rs.20 lakh per annum and her freelance income is Rs.10 lakh, she can opt for the presumptive taxation regime. Under such a regime, she can add only half the freelance earnings to her total income. Doing so, her annual income will stand at Rs.25 lakh. It must be noted that in such a case, Ritu must use ITR-4 for filing Income Tax Returns.
Things to Consider Before Opting for Section 44ADA
- The amount of one’s actual expenditure. Financial experts often recommend professionals with a low net profit ratio to avoid this tax provision.
- There is no such provision in Section 44ADA of Income Tax Act that allows professionals to deduct remuneration paid to partners from any presumptive income.
- Even if a professional firm does not adopt this tax provision, its partners can still opt for Section 44ADA in terms of interest or salary received for the same firm.
- Unlike some specific types of taxpayers, professionals who had previously chosen this tax provision can opt out of it at any time.
Other Sections Under Presumptive Scheme
Section 44AD
This scheme applies to small businesses with gross receipts or turnover below ₹2 crores. However, once chosen, you must stick with this scheme for five consecutive years. Under Section 44AD, income computation is based on a presumptive basis at a 6-8% rate.
Section 44AE
This scheme applies to small business owners engaged in plying, hiring, or leasing goods carriages. You can opt for the Presumptive Taxation Scheme if you own fewer than ten goods vehicles during the financial year.
FAQs
What is Section 44ADA of the Income Tax Act?
Section 44ADA of the Income Tax Act, 1961 provides a special scheme for the taxation of professionals who are not subject to audit under the regular provisions of the Income Tax Act. It applies to professionals such as doctors, lawyers, architects, and other specified professionals who have gross receipts up to ₹50 lakh in a financial year.
Who is eligible for Section 44ADA?
- Legal professionals (lawyers, advocates).
- Medical professionals (doctors, dentists, etc.).
- Technical professionals (engineers, architects).
- Accountants, Interior designers, and other similar professions.
The gross receipts of the professional must not exceed ₹50 lakh in a financial year.
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