written by | May 24, 2022

All About Section 44ADA of Income Tax Act 1961

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Section 44ADA deals with the percentage of gross receipts deemed profitable for a fiscal year. It allows you to declare a portion of receipts as an expense and the remainder as revenue. Section 44ADA of the Income Tax Act 1961 in India is higher than in other countries. Nonetheless, after studying and applying for all rebates, deductions, and allowances included within the Income Tax Act of 1961, you will find that your tax payments have not increased. The government handled the problem of all business groups with presumptive income under section 44ADA, covering numerous sorts of presumptive taxation systems. Some presumptive schemes are for small merchants and firms that are not required to keep books of accounts and are allowed to pay income tax at a rate of 6% to 8% and claim various deductions under sections 80C to 80U of the Income Tax Act of 1961.

Did you know?

Section 44ADA offers details about presumption taxation for small professionals. It was introduced during the FY 2016-2017 to calculate their profits and gains in certain situations. 

Section 44ADA 

In 2016-17, the government implemented a programme for presumptive taxes under section 44ADA. Section 44ADA establishes a straightforward way of taxes for small professions. Section 44ADA of the Income Tax Act of 1961 provides the presumptive taxation of income and gains derived from professions listed in Section 44AA(1). Section 44ADA is exclusively available to selected professions with less than ₹ 50 lakhs yearly gross earnings.

         

Section 44ADA: Scope and Purpose

Section 44ADA is a specific provision that allows small professionals to calculate their earnings and gains in certain circumstances. The government enacted presumptive income under section 44ADA to expand the streamlined presumptive taxes regime to certain professionals. Previously, the presumptive tax method was only applied to small businesses. The presumptive taxation method decreases the compliance load on small businesses and makes doing business easier. Profits are expected to be 50% of gross revenues under the presumptive taxation regime.

 

        

Assessees Who Qualify Under Section 44ADA

The Indian assessees listed below are eligible: 

  • Individuals
  • Hindu unbroken families (HUFs)
  • Partnership corporations (note that limited liability partnerships are not eligible)

Also Read: What comes under Section 119 of the Income Tax Act, 1961

Who Is Qualified for Section 44ADA?

Professionals mentioned in Section 44ADA of the Income Tax Act of 1961 who earn money less than ₹ 45 lakhs in a year are eligible beneficiaries.

Professionals working in the following fields are eligible:

  • Decorations for the inside
  • Technical assistance
  • Engineering 
  • Legal 
  • Other professionals are as follows:
  1. A cameraman, vocalist, lyricist, narrative writer, screenplay, producer, editor, actor, director, music director, art director, dance director, dialogue writer, and costume designer are movie artists.
  2. An authorised representative is a person who represents another person for a fee before a tribunal or other authority established by law. It does not include an employee of the person so represented or a person engaged in the practice of accounting.
  3. Other professionals who have been alerted

What Is the Assumed Income Offered?

The larger following is deemed income: 50% of total revenue from the occupation or the assessee's income from the occupation.

Section 44ADA Benefits

An assessee would receive the following advantages if they followed section 44ADA:

Section 44AA does not necessitate the keeping of books.

There is no need to have accounts audited under Section 44AB.

If an assessee fits the following conditions, they are required to keep books and have their accounts audited under section 44AB:

  • Income from one's profession is provided at a lower rate than 50% of gross earnings.
  • The assessee's net total income exceeds the exemption.

Consequences of Choosing the Section 44ADA

  1. All business expense deductions are expected to be allowed. Once profits are taxed at 50% of gross revenues, the remaining 50% is presumed deductible against all of the assessee's business expenses.
  2. For tax reasons, the write-down value (WDV) of money should be computed by the annual depreciation allowed. If the assessee later sold the asset, this WDV would represent the asset's tax value.
  3. Consumables, the services cost received from another book, stationery, phone charges, professional, daily expenditures, asset depreciation (laptop, vehicle, printer, and so on), and any other expense incurred to carry on the profession are examples of business expenses.

What Does Presumptive Taxation Mean?

A person engaged in business or profession is required by the Income-tax Act to keep regular account books and have his accounts audited. To relieve small taxpayers of this time-consuming task, the Income-tax Act established the presumptive taxation scheme in sections 44AD, 44ADA, and 44AE. A single person who uses the presumptive taxation scheme can report income at the set rate and avoid the time-consuming project of keeping books of account and having the accounts audited.

Objectives of Section 44ADA 

Let us understand why section 44ADA was included in the Presumptive Taxation 44ADA Scheme.

  1. To streamline the taxes system
  2. to lessen the tax compliance burden.
  3. To guarantee that small company professionals may do business with ease
  4. To achieve a balance between small business owners and professionals.

Implications of Section 44ADA

Only half of all total receipts are taxable income under IT, and the remaining 50% of gross receipts are deemed the taxpayer's business expenses. All corporate expenses include the cost of service or consumables, electricity, rent, stationery expenditures, asset depreciation, etc.

It is assumed that any cut down authorised under sections 30 to 38 is already permitted within 50% of the gross receipts limit. Furthermore, no extra deduction shall be permitted at return filing.

                    

Even asset depreciation is believed to have been provided within 50% of gross receipts. The written down value of any asset used for professional purposes is believed to be calculated as if the assessee had claimed and received the depreciation deduction for each of the relevant assessment years. As a result, deciding whether or not to engage in the strategy must be carefully evaluated. As a result, a taxpayer must first calculate his receipts and spending for a tax plan.

Also Read: Deductions under Section 80: Section 80C, 80CCC, 80CCD & 80D Income Tax

Example

Mr Rajesh, a CA, has gross receipts of ₹ 38 lakhs for the fiscal year of 2016-17. He paid rent of ₹ 2,50,000 without deducting tax at the source. He has an unabsorbed depreciation of ₹ 3 lakhs. Calculate his total earnings if he opts for section 44ADA.

Mr Rajesh is entitled to use section 44ADA since he is a practising CA with gross receipts of less than ₹ 50 lakhs. As a result, the earnings and gains of such a profession shall be regarded to be 50% of his gross paper receipts or a greater figure. So, ₹ 38 lakhs multiplied by 50% equals ₹ 19 lakhs. This will consider his total revenue for the fiscal year 2017-18.

Because section 44ADA is a deeming provision, no adjustment for disallowance under section 40A is necessary (a). Furthermore, any deduction permissible under sections 30 to 38 is deemed to have been completely executed, and no additional deduction is authorised under those sections. As a result, under section 32, unabsorbed depreciation is not deductible. As a consequence, the total earnings are ₹ 19 lakhs.

Conclusion

Section 44ADA income tax discusses assumption taxes for small professions. The government implemented it for the fiscal year 2016-2017 to compute their earnings and gains in specific instances. However, if you wish to take advantage of the presumptive tax structure, ensure your occupation is listed in section 44AA (1).

Section 44ADA of the Income Tax Act was added to exclude small business professionals from keeping books of accounts. Previously, this plan was exclusively available to small enterprises, and it streamlines taxation for professionals earning less than ₹ 50 lakhs per year. In reality, section 44ADA allows them to declare taxable income/profit at 50% of gross revenues.
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FAQs

Q: Is 44ADA required for professionals?

Ans:

While maintaining books of accounts is not required for individuals selecting for section 44AD, it is necessary for professionals opting for section 44ADA, according to sub-section 1 of section 44AA.

Q: Does section 44AD apply to professionals?

Ans:

Because section 44AD contains the word "business," it does not apply to professionals. Section 44AD only applies to individuals, partnerships, and HUFs Indian residents.

Q: Who qualifies for section 44ADA?

Ans:

 Professionals described in Section 44AA of the Income Tax Act of 1961 are eligible beneficiaries with an annual gross income of fewer than ₹ 50 lakhs.

Q: What exactly is presumptive taxation?

Ans:

Presumptive taxation permits you to pay your taxes based on presumed income. You do not need to estimate your income by subtracting your costs from your revenue, taking a proportion of your overall revenue, and paying taxes.

Q: What are the section 44ADA benefits?

Ans:

The eligible assessee engaged in any business (except the business of plying, hiring, or leasing goods carriages referred to in section 44AE) whose turnover or gross receipts from such business do not exceed the audit limit prescribed under these provisions may elect the presumptive taxation scheme.

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Disclaimer :
The information, product and services provided on this website are provided on an “as is” and “as available” basis without any warranty or representation, express or implied. Khatabook Blogs are meant purely for educational discussion of financial products and services. Khatabook does not make a guarantee that the service will meet your requirements, or that it will be uninterrupted, timely and secure, and that errors, if any, will be corrected. The material and information contained herein is for general information purposes only. Consult a professional before relying on the information to make any legal, financial or business decisions. Use this information strictly at your own risk. Khatabook will not be liable for any false, inaccurate or incomplete information present on the website. Although every effort is made to ensure that the information contained in this website is updated, relevant and accurate, Khatabook makes no guarantees about the completeness, reliability, accuracy, suitability or availability with respect to the website or the information, product, services or related graphics contained on the website for any purpose. Khatabook will not be liable for the website being temporarily unavailable, due to any technical issues or otherwise, beyond its control and for any loss or damage suffered as a result of the use of or access to, or inability to use or access to this website whatsoever.