Presumptive Tax Scheme – Presumptive Taxation under section 44ADA

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How Presumptive Tax Helps Creative Professionals to Save Taxes and File Returns?

A professional, freelancer or consultant can pay tax on just 50% of their gross annual profit or income. It can be done with Presumptive Taxation under section 44ADA. The only thing you should ensure is that the total annual income must be under Rs. 50 Lakh. Let’s take an example to get a better understanding.Â

Radhika is a famous model who earned Rs. 40 Lakh in 2019-20 from April 1 2019 to March 31, 2020. Since Rs. 40 Lakh is a big amount, it also attracts lots of tax. In a normal scenario, her taxable income without presumptive taxation scheme (PTS) would be :

Gross Income by taking several projects and works Rs. 40 Lakh
Expenses related to work to claim as deductions from the tax –Â

  • MeetingÂ
  • Travel
  • Communication
Rs. 10 Lakh
Total income that she would have to pay tax on Rs. 30 Lakh

 

Radhika would be paying tax on Rs. 30 Lakh without presumptive taxation 44AD. But her taxable income can be Rs. 20 Lakh, i.e. half of her total gross income, with presumptive taxation.Â

Taxable Income With Presumptive Taxation Section

Gross income from several projects and works Rs. 40 Lakh
Presumed taxable income with Presumptive Taxation Rs. 20 Lakh

 

With presumptive taxation, she can assure tax savings on Rs. 10 Lakh. Here’s the presumptive tax calculator to help you determine how much she could save on tax:Â

Tax calculation before applying presumptive taxation Tax calculation after applying presumptive taxation scheme
Income she would have to pay tax on – Rs. 30 Lakh Income she would have to pay tax on – Rs. 20 LakhÂ
Tax calculation for FY 2019-20 according to slabs
Taxable Income TaxTaxable Income Tax
< Rs. 2.5 LakhNA< Rs. 2.5 Lakh NA
Rs. 2.5 Lakh to Rs. 5 LakhRs. 12,500Rs. 2.5 Lakh to Rs. 5 LakhRs. 12,500
Rs. 5 Lakh to Rs. 10 Lakh Rs. 1,00,000Rs. 5 Lakh to Rs. 10 LakhRs. 1,00,000
Rs. 10 Lakh to Rs. 30 LakhRs. 6,00,000Rs. 10 Lakh to Rs. 20 LakhRs, 3,00,000
Total Rs. 7,21,500Total Rs. 4,12,500

 

As you see, Radhika can save Rs. 3 Lakh in taxes with a presumptive taxation scheme. Hence, she will be paying Rs. 3 Lakh less when it comes to paying income tax. In both cases, 4% cess would be added to her income. Â

In addition, she can claim all the tax-saving deductions under Section 80C that come above the PTS. The presumptive tax can be availed by consultants, freelancers, and professionals who provide their expertise and services for their living.Â

What would happen if you have net taxable income less than half of the gross income you have earned and you kept books of accounts properly? In Radhika’s case, she took her taxable income down to Rs. 15 Lakh as her expenses related to work were higher. It is even less than half of the total income. In that case, you must get your accounts audited and pay on taxable income without availing presumptive taxation scheme.Â

But those cases wouldn’t happen that much. Usually, professionals and freelancers don’t have plenty of expenses related to work that they can claim. So, 50% of total income can be under presumption as your profit works out as per section 44AD

Should You Include Foreign Income?Â

Most creative professionals usually have a doubt related to foreign income. They remain confused about whether their income from clients outside India is taxable in India. Since you are getting income in your country as an Indian resident, it should be taxed in India also.Â

Presumptive Taxation MeaningÂ

Government has introduced presumptive taxation for professionals under section 44AD of income tax act. Under this act, professionals can announce 50% of their income as taxable and after deductions under section 80, they have to pay tax on the rest of income. Creative professionals like interior designers, architectural professionals, technical consultants, or advertisers can opt for this scheme. Â

If you are an Indian resident and you receive income in your foreign bank account sent by a foreign client, it will still be taxable in India. You are entitled to get tax relief on income minus taxes in India while filing return according to DTAA, if you pay taxes in a foreign country on your foreign income.  Presumptive Taxation involves indirect methods for the calculation of tax liability. In this method, your taxable income is estimated on assumptions. You have to announce a specific percentage of your income receipts as your income and pay a specific percentage of the same as tax. Professionals with up to Rs. 50 Lakhs of gross receipts can go for presumptive taxation for April 1, 2016 to March 31, 2017.Â

Why Opt For a Presumptive Tax Scheme for Filing Returns?Â

  •  Easy in filing returns – The presumptive taxation ITR form is a lot easier and shorter to fill as compared to the typical ITR form of 30 pages.Â
  • Tax savings – Professionals usually don’t have to declare so many expenses. All they need to do is declare half of their income as profit and rest as an expense. They can save a lot in taxes.Â
  • Costeffective – Now professionals can file income tax returns themselves rather than consulting a CA or tax consultants. They usually charge up to Rs. 15000 for those filings.Â

What to do if freelancing is your side business and you have a full-time job?Â

Salaried employees usually have their full-time job but they also provide consulting or freelance work as well for recurring income. In that case, presumptive taxation can also help them.Â

You have two sources of income by having a job and freelance work – salaried and non-salaried income. So, both income sources are taxable. You can calculate the tax on salary the same way. To calculate the total annual taxable income, you should add your income from freelance work to your salary. This way, you can opt for a presumptive taxation scheme and add just half of the income from freelance work to your salary income.

For example, if you earn Rs. 20 Lakh per annum from salary and Rs. 10 Lakh per annum as a freelancer, you can add just half of your freelance income with presumptive taxation. Hence, the total annual income must be Rs. 25 Lakh. To file ITR, be sure to use ITR-4 in that case.

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