Many people mistakenly believe that income earned from freelancing isn’t taxed. But that’s not true! Freelancers, consultants, and independent professionals are responsible for paying income tax on their earnings.
There is a provision in the Income Tax Act, Section 44ADA, that offers a benefit to freelancers. However, this benefit applies only if your total freelancing income in a financial year is below ₹50 Lakhs. To make the most of this tax scheme, it’s important to understand its key features.
What Is 44ADA in Income Tax?
The Income Tax Act of India offers information on Presumptive Taxation for certain professionals under Section 44ADA. This scheme aims to streamline income reporting for professionals with annual gross receipts up to ₹50 Lakhs. Income earned from foreign clients is included in such taxation.
Under Section 44ADA, eligible professionals like doctors, lawyers, architects, and accountants can presume their taxable income as 50% of their gross receipts. This eliminates the need for maintaining detailed accounting records. The provision was introduced to reduce compliance burdens for small professionals and encourage the growth of independent practices in India.
What are the Objectives of Section 44ADA?
Some of the key objectives of Section 44ADA of the Income Tax Act are:
| S. No. | Objective | Details |
| 1 | To ease the compliance burden on small professionals | The provision exempts small professionals from maintaining detailed books of accounts. |
| 2 | To promote small businesses | Section 44ADA simplifies taxation for small businesses and encourage professionals to start their own ventures. |
| 3 | To simplify the taxation process | The provision allows small professionals to pay tax on a presumptive basis, i.e., at a fixed rate of 50% of gross receipts. |
| 4 | To reduce tax disputes | 44ADA provides a simple and easy-to-understand taxation scheme for small professionals. |
Overall, the objective of Section 44ADA of the Income Tax Act is to provide a friendly environment for small professionals to easily carry out their business activities and promote their growth, while simultaneously bringing in tax revenue for the government.
Which Professions are Eligible Under Section 44ADA?
Professionals belonging to the following categories are eligible to make use of the benefits of presumptive taxation under Section 44ADA of the Income Tax Act:
- Accountants
- Medical professionals
- Legal professionals
- Technical consultants
- Architects
- Engineers
- Interior decorators
- Company secretaries
- Film artists
- Other professions as notified by the Central Board of Direct Taxes
Note: The presumptive taxation regime under Section 44ADA is applicable to the following types of residents – individuals, Hindu Undivided Families (HUFs), and partnerships other than Limited Liability Partnership (LLP) firms. This means that professionals who fall under these categories and have gross receipts up to Rs. 50 Lakhs in a financial year can take advantage of the benefits of presumptive taxation.
Rate of Presumptive Tax under Section 44ADA
The rate of presumptive tax under Section 44ADA is presently fixed at 50% of the gross receipts of eligible professionals. This means that a professional who has gross receipts of ₹10 Lakhs in a financial year will be required to pay tax on ₹5 Lakhs (i.e. 50% of gross receipts) as per the income tax slabs applicable for that year.
Note: Professionals who opt for presumptive taxation under Section 44ADA cannot claim any deductions or expenses against their income. They are required to pay tax at the prescribed rate of 50%.
Benefits of Presumptive Income Under Section 44ADA
Section 44ADA offers several advantages for professionals who choose presumptive taxation:
- Reduced Compliance Burden: Maintaining detailed accounting records and undergoing audits can be time-consuming and expensive. Presumptive taxation eliminates these requirements, simplifying the tax filing process for eligible professionals.
- Potentially Lower Tax Bill: By calculating tax on a presumed income (50% of gross receipts), professionals may benefit from a lower tax liability, especially those with minimal deductible expenses.
- Improved Cash Flow Management: Presumptive taxation allows professionals to pay taxes based on a fixed percentage of their earnings, facilitating better cash flow management without the complexities of maintaining detailed records or claiming deductions.
Exemptions Under Section 44ADA of the Income Tax Act
Individuals coming under Section 44ADA of the Income Tax Act are liable to a variety of privileges, including:
- Entitlement to all deductions offered by Sections 30 to 38 of the Income Tax Act, such as deductions for business expenditures, unabsorbed depreciation, and other allowances.
- While depreciation deductions can be claimed, the WDV (Written-down value) of depreciable assets can also be recalculated. This implies that professionals who have chosen the Section 44ADA presumptive tax plan can claim depreciation on their assets and thus lower their taxable income proportionately.
Provision for Salaried Individuals
For salaried individuals who choose to freelance on the side, their income needs to be combined for tax purposes. This means adding their regular salary to their earnings from freelance work to determine their total annual income. This combined income is then taxed according to the individual’s applicable tax bracket.
For example, suppose Mr A earns a yearly salary of ₹10 lakhs and earns an additional ₹5 lakhs through freelance work. If Mr A opts for the presumptive taxation scheme under Section 44ADA, he can add only half of his freelance income, i.e., ₹2.5 lakhs, to his total income. Thus, his total income for the year will be ₹12.5 lakhs. Note here that Mr A will have to use ITR-4 while filing his Income Tax Returns in such a case.
Things to Consider Before Opting for Section 44ADA
- Expense Analysis: Since Section 44ADA taxes a fixed percentage of gross receipts, it might not be ideal for professionals with high operating costs. Evaluating your actual expenses helps determine if the scheme offers a tax benefit.
- Partner Compensation: Payments made to partners are not deductible under Section 44ADA. Factoring in partner compensation is crucial to assess the scheme’s impact on your overall tax liability.
- Partner Tax Treatment: Even if a firm itself doesn’t opt for Section 44ADA, individual partners can still choose it for their interest or salary income received from the firm. This offers some flexibility in tax planning for partnerships.
- Opt-out option: Professionals who had previously chosen this tax provision may opt out of it whenever they want to.
Considering all these aspects, individuals can decide whether they need to opt for Section 44ADA or not. They can explore ways to maximise their benefits from this tax provision and thereby save more on their annual income tax liabilities.
Final Words
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