Do you belong to the salaried class? Are you frustrated by the high amount of income taxes you pay? Together with indirect taxes, like GST and excise on fuel, you end up paying more than 50% of your income in taxes.
Do you have friends who earn more but pay less taxes? Many self-employed professionals, consultants, and freelancers pay less tax. It is because such professionals, as well as companies, are taxed after deducting most of their expenses incurred on earning income before calculating income tax.
Salaried employees do not get this benefit apart from a standard deduction of Rs 50,000 which was re-introduced in Budget 2018 to bring parity, but it’s a paltry sum.
A scheme of presumptive taxation was introduced under Section 44ADA of the Income Tax Act from financial year 2016-17 for small professionals. This provides a simple method of taxation, offering a scheme of taxation on profits and gains arising from various professions.
The benefit can be availed only by these specified professionals whose annual gross receipts are under Rs 50 lakh. Under this scheme, taxable income is presumed at 50% of the gross receipts.
For whom is the presumptive taxation scheme of section 44ADA designed?
The presumptive taxation scheme of section 44ADA is designed to give relief to small taxpayers engaged in specified professions.
Persons eligible for presumptive taxation scheme of section 44ADA
A person resident in India engaged in following professions can take advantage of presumptive taxation scheme of section 44ADA:- 1) Legal 2) Medical 3) Engineering or architectural 4) Accountancy 5) Technical consultancy 6) Interior decoration 7) Any other profession as notified by CBDT.
The benefit of section 44ADA is eligible only in case of assessee who is an: a) Individual and b) Partnership firm other than a Limited Liability Partnership.
Manner of computation of taxable income in case of a person adopting the presumptive taxation scheme of section 44ADA
In case of a person adopting the provisions of section 44ADA, income will be computed on presumptive basis, i.e. @ 50% of the total gross receipts of the profession.
In other words, in case of a person adopting the provisions of section 44ADA, income will not be computed in normal manner but will be computed @50% of the gross receipts.
Presumptive income computed @ 50% is the final income and no further expenses will be allowed.
A person who adopts the presumptive taxation scheme is deemed to have claimed all deductions of expenses. Any further claim of deduction is not allowed after declaring profit @ 50%.
Maintenance of books of account if a person opts for presumptive taxation scheme of section 44ADA
In case of a person engaged in a specified profession as referred in section 44AA(1) and opts for presumptive taxation scheme of section 44ADA, the provision of section 44AA relating to maintenance of books of account will not apply.
In other words, if a person opts for the provisions of section 44ADA and declares income @50% of the gross receipts, then he is not required to maintain the books of account in respect of specified profession.
Tax liability in case of salaried (A) and professional individual (B) earning similar income
Tax benefit under Sec. 44ADA
Note: Tax liability in lakhs
As we can see from the table above, the tax liability reduces significantly (range 50% to 100%) if one qualifies for and uses Sec 44ADA.
We are in an era of gig economy where the labour market is characterised by the prevalence of short-term contracts or freelance work as opposed to permanent jobs.
So if you are a professional and not using this Section, consult your chartered accountant or a tax professional and see how you can use it.
If you are a salaried professional, then you will need to renegotiate your contract of employment from employee to consultant / professional / freelancer. Check with your legal teams to see whether it’s possible.
Some people could be afraid of doing so: a consultant doesn’t provide job security, they could argue. Today, in the private sector and especially after the pandemic, no job is secure, there is no guarantee that you will have your job till you retire or till you choose to work.
You may not be entitled to benefits of medical cover and provident fund provided by the employer, if you chose to be a professional. That’s not a big deal, you can open a Public Provident Fund account and take medical insurance policy on your own.
So, what are you waiting for? Explore this section of income tax and check whether your current profile/job/work fits in the eligible list.
If yes, find out whether your employer is agreeable to change your contract and free yourself from the burden of high taxes.
Disclaimer: Check with your chartered accountant and/or lawyer your eligibility for availing this section before taking any decision.