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 Section 44ADA of Income Tax Act, 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.

What is Section 44ADA of Income Tax?

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 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.

What are the Objectives of Section 44ADA?

These following pointers emphasise on 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.

Which Professions are Eligible Under Section 44ADA?

Besides generating annual earnings of less than Rs.50 lakh, individuals who practise these specific professions are deemed eligible under this Section of ITA.

  • Accountants
  • Medical services
  • Legal services
  • Technical consultants
  • Engineers
  • Architecture
  • Interior Decorators
  • Film artists
  • Company secretaries
  • Other professions mentioned by the Central Board of Direct Taxes

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.

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Rate of Presumptive Tax under Section 44ADA

The income covered underSection 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.

Benefits of Presumptive Income Under Section 44ADA

The top benefits of Presumptive Taxation for professionals are discussed below –

  • Hassle-free filing process

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.

  • Reduction in tax liability

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.

  • Scope of saving money

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.

Exemptions Under Section 44ADA

Individuals who follow this section of ITA will be allowed these following –

  • 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 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.

Things to Consider Before Opting for Section 44ADA

It is suggested that one must weigh in these factors before adopting this tax provision –

  • 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.

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.