Income Tax, Tax for free lancers and consultants

Section 44ADA – presumptive taxation section for professionals

This is a highly beneficial section for tax payers belong to certain categories such as:

  • Engineering
  • Legal
  • Architectural profession
  • Accountant
  • Medical
  • Technical consultant
  • Interior business
  • Other notified professionals such as authorized representatives, film artists, certain sports-related persons, company secretaries and information technology.

The primary benefit of this section is that such assessees’ need to offer only 50% of their receipts as profit i.e. the amount on which tax liability will be determined.

Where the actual expenditure incurred to earn the income is low, the tax payers will have a significant tax benefit. There are other benefits as well such as not requiring to maintain books of account (though this will not take away the effort involved in filing GST returns).

The best part about the deduction is that each professional has a right to choose the method most beneficial to him.

Eligible Assessees

Resident Assessee engaged in profession whose Gross receipts does not exceed Rs.50Lakhs.

Status of Assessee

Individual, Hindu Undivided Family, Partnership Firm( Other than limited liability partnership). Only these assessee’s can file returns under Section 44ADA.

Key points

  • Profit or Gains from Business Profession shall be determined at 50% of the Gross receipts or higher.
  • No deductions of expenses under sections 30 to 38 of the Income Tax Act, 1961 which are normally available shall be allowed.
  • No expenses relating to partner remuneration, salary, interest (Section 40(b)) shall be deducted. Further any brought forward depreciation is not allowed to be set off.
  • If tax payer declares income under Section 44ADA then he not required to maintain books of Accounts.
  • Where the assesse opts for section 44ADA, then advance tax shall be paid by 15th March of the Financial year i.e. advance tax has to be paid in one instalment as against four instalments under regular provisions.

Where a tax payer declares income lower than 50% then he shall be required to maintain Books of Accounts and get the same audited.

Our view

Section 44ADA can be beneficial for many consultants and free lancers especially one-man shop where establishment and operating expenses are not significant.

Also, it is critical that the tax payer is eligible for 44 ADA based on the specified professions, for example, if a person is offering accountancy services and tax services then whether he will qualify under this Section. If there is any doubt, then it is best to consult a Chartered Accountant.

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