Presumptive Taxation Scheme for Freelancers/ IT professionals- Section 44ADA

Introduction:

The topic of discussion in this article is the presumptive taxation scheme under section 44ADA with a special focus on IT freelancers/ IT professionals. Covid-19 has increased the number of engineers & IT professionals who are doing IT projects on freelancing mode. A question comes before us about the taxability of income earned by such IT freelancers (professionals) from taking projects on a freelancing basis.

The first thing is very clear their income is certainly taxable in India and they should file their ITR online and disclose such income and pay income tax. But the next question comes what will be the simplest manner of declaring income for IT freelancers (professionals) while ITR filing online. The answer to this question might be the “Presumptive Scheme under Income Tax” especially prescribed for businesses & professionals. The Presumptive Taxation Scheme for professionals has been prescribed by Section 44ADA of the Income Tax Act. Let’s start the discussion over the provisions of section 44ADA of the Act with a special focus on IT freelancers/ professionals.

Presumptive Scheme u/s 44ADA for professionals

• Presumptive Scheme u/s 44ADA is a simple scheme for declaring taxable income in the case of professionals. The scheme is optional i.e. it is the choice of the professional to opt for either the presumptive scheme or pay tax on the basis of books of accounts.  
• As per Section 44ADA, notified professionals may opt for the presumptive scheme where a taxpayer can offer 50% or more of his professional receipts as his taxable profits from the profession. In this case, no separate claim of any expenditure including depreciation is allowed and the taxable profit (50% or more) as declared by the taxpayer is accepted as his net business profits. Example: Suppose your gross receipts from the profession are Rs. 30 Lakhs, then you will have to declare a net profit of Rs. 15 Lakhs or more under the presumptive scheme irrespective of the quantum of expenditures incurred actually.
• If a professional opts for the presumptive scheme, he is not required to maintain books of accounts.
• But if the professional claims the profits to be lower than 50% in his income tax return filing, in that case, he/she will be required to maintain books of accounts and also get a tax audit done.

Who can avail presumptive scheme u/s 44ADA?

• Only Resident Individuals or a partnership firm engaged in a specified profession can opt for the presumptive scheme u/s 44ADA.
• Non-residents, LLPs, HUF, or a company cannot opt for the presumptive scheme u/s 44ADA.

Further, the presumptive scheme is available only for those taxpayers whose gross receipts or turnover from the profession does not exceed Rs. 50 Lakhs. In case, your turnover from the IT freelancing/ IT profession exceeds Rs. 50 Lakhs, you cannot opt for section 44ADA. Rather you will have to get your accounts audited as the Income Tax law requires a compulsory tax audit in case the turnover from the notified profession exceeds Rs. 50 Lakhs.

What are the professions specified for the purpose of section 44ADA?

Section 44ADA of the Income Tax Act specifies the following professions to be eligible to avail of the presumptive scheme:

• Legal
• Medical
• Engineering or Architectural
• Accountancy
• Technical consultancy
• Interior decoration
• Any other profession notified by the CBDT

What are the professions notified by the CBDT for the purposes of section 44ADA?

In addition to the list of professions specified above, the CBDT has also notified the following professions for the purpose of section 44ADA:

• Profession of Authorized Representative
• Profession of Film Artists (Actor, cameraman, director, music director, art director, dance director, editor, singer, lyricist, story writer, screen playwriter, dialogue writer, dress designer), etc.
• Profession of Company Secretary
• Profession of Information Technology

Can IT professionals opt for presumptive scheme u/s 44ADA?

Yes, as seen in the list of notified professions above, the IT freelancers/ professionals can opt for presumptive scheme u/s 44ADA while e filing of income tax return.

Which ITR form is used for presumptive taxation scheme u/s 44ADA?

Individual IT professionals opting for the presumptive taxation scheme should use ITR 4 form for income tax e-filing.

What are the benefits of the opting presumptive scheme for IT professionals?

Presumptive taxation scheme comes with the following benefits to the IT freelancers/ professionals:

• No need to maintain the books of accounts
• No need to pay advance tax on a quarterly basis, payment in only one installment on or before 15^th March of the financial year is sufficient.
• Easy to calculate taxable income and file income tax return
• No restriction on opting-out from the presumptive scheme in the future unlike section 44AD (presumptive scheme for traders)

What are the precautions to be taken while ITR filing online under the presumptive scheme for professionals?

• Under the presumptive scheme, the Income Tax Department will not ask you to justify the taxable profits declared for the financial year. The department will not ask for any proof of expenses incurred by you. But the Assessing Officer may ask you to substantiate your gross receipts or turnover. So, a proper record of sales invoices raised by you during the financial year should be kept in safe custody.
• Further, you should also keep a proper record of cash transactions (receipts & payments) as the department can also verify the cash balances held by you at the end of the financial year.
• In addition, a list of all creditors & debtors at the end of the financial year should also be prepared and kept in records so that it may be produced before the Assessing Officer if asked by him.

Conclusion:

Presumptive Taxation Scheme u/s 44ADA is a very good option for IT professionals/ freelancers as it reduces the compliance burden of the professionals. Your time and cost involved in hiring accountants is reduced to some extent. So, gear up friends as income tax filing season is about to start, and file your income tax return online.

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Disclaimer: The above article is meant only for educational purposes and therefore, readers should act diligently before applying the information contained in this article.