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.
To make the most of the benefits accompanying this presumptive tax, one must have a firm grasp on its fundamentals.
This section states 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 ITA 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.
It must be noted that in case a professional accrues earnings from foreign-based clientele, he/she must pay tax on it.
These following pointers emphasise the significant objectives of Section 44ADA of Income Tax Act –
|S.N.||Objectives in Brief|
|Objective 1||Simplification of the tax system for self-employed professionals.|
|Objective 2||Reduction of the tax burden on self-employed individuals.|
|Objective 3||Facilitating a smooth way of conducting business.|
|Objective 4||Establishment of parity among businesses under Section 44ADA of the Income Tax Act.|
Besides generating annual earnings of less than Rs.50 lakh, individuals who practice these specific professions are deemed eligible under this Section of ITA.
Notably, this taxation regime of presumptive income under section 44ADA applies to residents who are – HUF, individuals, Limited Liability Partnership Firms, Partnerships other than LLP.
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. Also, eligible professionals can declare expenses over 50% of the total receipts if required.
The top benefits of Presumptive Taxation for professionals are discussed below –
The tax filing process is relatively short and straightforward when pitted against other ITR forms. It not only helps to save a lot of time and energy but also reduces the scope of making any mistake to a great extent.
Under normal circumstances, professionals do not have a substantial amount of expenses to declare. Nonetheless, by declaring 50% of the earnings as profit and the remainder as expenses, one can save on taxes successfully.
The simple tax filing process and hassle-free steps encourage individuals to file income tax returns on their own. This eliminates the need for individuals to seek the assistance of professional tax consultants. Generally, tax consultants can charge as much as Rs.5000 to Rs.15000 for filing income tax on behalf of taxpayers.
Despite these advantages, there are a few drawbacks of Section 44ADA that self-employed professionals must be aware of.
Individuals who follow this section of ITA will be allowed the following –
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 Ritu’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.
It is suggested that one must weigh in these factors before adopting this tax provision –
Keeping all these aspects in mind, one can decide whether to opt for Section 44ADA of Income Tax Act or not. Furthermore, they should find ways to make the most of this tax provision and save more on their annual income from the tax forefront.
You cannot do so. Section 44AD favours only partnership firms that are not Limited Liability Partnerships.
If you wish to take benefit of the Presumptive Taxation Scheme, your turnover cannot exceed Rs. 1 crore.
No, you do not have to pay advance taxes if you are taking advantage of Section 44AD.
If an assessee falls in the following margin:
– Income from the profession is offered at a lower rate than 50% of the gross receipts.
– If the total income of the assessee is much more than the basic exemption.
The total turnover of the firms will be counted in this situation.