Is Section 44ADA of the Income Tax Act Optional or Compulsory?

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Is Section 44ADA of the Income Tax Act Optional or Compulsory?

What are your thoughts about Section 44ADA? When it evolves around taxes – there is always the question of, “is it mandatory or optional? But, the answer to the above question is that it is completely optional.

This means you will have to choose to adopt it – but if you do choose to adopt it, you need to know that this is entirely beneficial to you. Do you want to know how? In order for you to know that, you have to know everything about Section 44ADA, or should we say a section of presumptive taxation.

What does Section 44ADA Mean?

Did you know that, in order to give relief to small businesses and professional taxpayers from the job of maintaining books and books of accounts and getting books of accounts also audited? CBDT introduced the presumptive taxation scheme under the Budget of 2016 for specific professionals. So, after 2016 – a professional with gross receipts of up to Rs. Fifty lakhs can take advantage of the presumptive taxation under Section 44ADA.

Do you belong to the category that can adopt the Section? Let’s find out.

Who Can Adopt for Section 44ADA?

Are you a resident who pays tax in the following professions? If you are, then you can take advantage of the presumptive taxation scheme under the Income Tax Section 44ADA:

  1. Architecture
  2. Accountancy
  3. Technical Consultancy
  4. Medical
  5. Legal
  6. Interior Decoration
  7. Film Artists
  8. Authorized Representatives

But honestly, why was this scheme launched? It has its own sets of scope and objectives, which you will have to know in order to understand it better.

Objectives of the Scheme

Section 44ADA was introduced with a motive, and here they are:

  • Simplifying the tax process for self-employed professionals
  • Tax compliance and liability have been reduced.
  • Make it easier for self-employed professionals to conduct business.
  • To achieve a balance between small enterprises and small professionals.

This means that the assesses is not required to disclose information about their company expenses. They can simply pay tax at 50% of their gross receipts, with the remaining 50% being permissible expenses under the business and profession provisions of the Act, without having to refer to other provisions of the Act.

So, would you adopt it? Suggesting this to you – there are quite a lot of pros if you adopt the scheme, want to know them – just read on.

Perks of Adopting Section 44ADA of the Income Tax Act

  1. Easy Tax Filing

In comparison to conventional tax filing, the tax filing process for presumptive taxation becomes fairly straightforward. It is exactly due to the fact that there are fewer compliance procedures to follow, and the documentation required is minimal.

  1. Reduced Compliance

The taxpayer is also not required to keep detailed books of accounts in accordance with section 44AA and to have them audited in accordance with Section 44AB. This alleviates the strain on taxpayers and allows them to concentrate completely on their careers.

  1. The Choice to Move in and Out of the Scheme with no Restriction

Professionals can opt in and out of this program at any time, with no lock-in or 5-year restrictions, unlike the rules of Section 44AD that apply to businesses.

  1. Reduced Tax Liability

Professionals typically do not have larger capital expenditures or substantial ongoing expenses to meet their professional obligations. Despite this, Section 44ADA allows them to tax only 50% of their gross receipts, which can significantly cut their tax burden.

But, on the whole concept – have you ever wondered what would be happening if your profit is more than 50%? Don’t wonder anymore – the answer is right here.

If Profits are More than 50%

If your actual income from your profession is greater than 50%, you must, in my opinion, submit a higher percentage of your professional receipts as your professional income because the law does not only mandate a fixed percentage but also allows you to give a higher percentage as your income.

Because you are not required to keep books of accounts, it may be difficult to demonstrate that your actual revenue exceeds 50% of your gross receipts.

Higher income, on the other hand, can be simply established from your investments and personal costs incurred through the banking channel. As a result, people who conduct their significant transactions through the banking channel will be unable to conceal the fact that their actual income exceeds 50% of their gross earnings.

So, before you choose the bare minimum proportion of 50% that you have to contribute as income, consider the total of your investments and personal costs incurred over the year. If the department is able to show it clearly, such hidden money may be taxed as unexplained income at 60%, plus interest and penalties.

Final Thoughts

Adopting this scheme or not adopting it is entirely up to you, but you need to know that it is not compulsory. But if you do adopt this scheme – it is beneficial to you and your business accounts.

Read More: Be One Step Ahead! Estimate Your Income Tax Liabilities In Advance