Introduction: 

The Income Tax Act, 1961 mandates professionals and traders to maintain books of account and file income tax returns at the end of the financial year, where audit of their accounts is required To facilitate this process and reduce compliance burden upon which the government instituted Presumptive Tax Scheme under Section44ADA of the Income Tax Act

As a self-employed person, it is important to understand the income tax system. These provisions include Section44ADA of the Income Tax Act. In this blog post, we will examine the specifics of Section 44ADA for assessment year 2020-21.

Section 44ADA:

Section 44ADA was introduced by the Income Tax Department to offer relief to small taxpayers involved in specified professions. Under this section, eligible professionals can declare their income at a presumptive rate and are exempt from the obligation to maintain detailed books of accounts. The proposed tax regime facilitates entrepreneurship and reduces the regulatory burden on small businesses. Benefits under this scheme are assumed to be 50% of gross income.

Purpose of Section 44ADA :

• The Government of India introduced Section44ADA in the Income Tax Act to provide for the benefits of the assessee.
• The main purposes are listed as follows:
• To reduce the compliance burden and foster ease of doing business.
• To extend the benefits of presumptive taxation to small professionals as well as small businessmen.
• To simplify the tax system in the country.

 Eligibility for the Section 44ADA: 

In considering annual income, it is important to understand the specific eligibility criteria associated with this program. To be eligible for the presumptive scheme, a person must be a resident of India. The Union Budget 2021 provides that Section44ADA applies only to the following taxpayers.

• Individuals who are members of a Hindu Undivided Family (HUF).
• An individual taxpayer
• Partnership firms excluding Limited Liability Partnership (LLP).

Further, a criterion regarding the occupation of the assessee is mentioned in Section 44ADA of the Income Tax Act. The details of the occupations specified under this provision are given below:

• Interior decorations
• Engineering
• Accounting
• Legal
• Medical
• Architecture
• Film artists encompass a variety of roles, including producers, editors, actors, directors, music directors, art directors, choreographers, photographers, musicians, songwriters, storytellers, the screenwriting or dialogue writing, and fashion designers
• An authorized representative is defined as a person who represents another individual for a fee before a tribunal or any authority established under any law. This definition excludes employees of the represented individual or individuals engaged in the profession of accountancy.

Exemptions:

• Those complying with Section44ADA will be empowered to do the following.
• A qualified individual is entitled to all deductions under Sections 30-38, including allowances and unabsorbed depreciation.
• After deducting authorized depreciation, the write-down value (WDV) of depreciable assets will be recalculated.

 Presumptive taxation scheme under Section 44ADA:

• Under Section44ADA, eligible employees can declare their income at an amount calculated to be 50% of the gross income. This means that if your total business income is Rs 10 lakhs, your taxable income is assumed to be Rs 5 lakhs (50% of Rs 10 lakhs).
• Salaried individuals often choose to supplement their income with other sources such as freelancing or tutoring. In such cases, their salaries are added to other income to determine the total income for the financial year.

Advantages of opting for Section 44ADA:

• The main advantage of the section44ADA option is to reduce the compliance burden on junior taxpayers. Unlike ordinary taxpayers, employees who opt for assessed tax treatment under section44ADA are not obliged to carry out detailed calculations. Instead, only records of gross income and operating expenses are needed.
• Another advantage of Section 44ADA is that it reduces the tax audit burden on taxpayers. Under the regular tax regime, taxpayers whose gross income exceeds Rs. 50 lakh tax account is mandatory. However, taxpayers opting for Section 44ADA are exempt from tax computation, provided they report their income at the assessed rate.
• Your tax liability reduces significantly as 50% of the income is declared as profit, while the remaining amount is accounted for as expenses.
• Trading professionals often have to hire a chartered accountant to audit their accounting books, which can be very expensive. However, under Section 44ADA, there is no need to comply with tax calculations before filing ITR, making the process easier and more cost-effective for taxpayers.
• Section 44ADA of the Income Tax Act, filing taxes is hassle-free, allowing individuals to deal with them in their own way This method also allows them to bypass the need for tax returns about the consultant and you save money in the process.

Important Factors:

Below are the key factors one should consider before choosing presumptive taxation:

• Section 44ADA does not allow qualified taxpayers to deduct compensation paid to partners from presumptive income.
• Partners of a firm can elect section 44ADA for their remuneration or benefits, even if the firm itself does not comply with this tax provision.
• Partners of a firm can elect section 44ADA for their remuneration or benefits, even if the firm itself does not comply with this tax provision.

Conclusion:

Section 44ADA of the Income Tax Act provides valuable benefits to small taxpayers engaged in particular transactions. It reduces the compliance burden and provides independence from tax audits. If you are qualified under this category, it is recommended that you seek the advice of a tax professional to fully understand its policies and benefits.