Can IT Freelancers/Professionals Use the Income Tax Presumptive Scheme?

If you work as a freelancer, professional, or consultant, you are only required to pay income tax on half of your gross annual income. You can accomplish this by utilizing Section 44ADA of the Income Tax Act, 1962, Presumptive Taxation Scheme. The only stipulation is that your total annual income should be less than 50 lakh. In this article we’ll discuss Presumptive Taxation Scheme for Freelancers/ IT Professionals.

Before we shall move on to discuss upon Presumptive Taxation Scheme for Freelancers/ IT Professionals. Let us first discuss about Presumptive Taxation and also, we should be aware of the process about how the Freelancer’s earns money.

Key Abstract

For professionals, the government has implemented a new presumptive taxation scheme (Section 44ADA), under which professionals can file a return declaring 50% of their gross receipts (up to 50 lakhs) as income, and after deducting section 80 deductions, professionals must pay tax on the balance total income.

Architectural professionals, interior decorators, advertisers, and technical consultants are among the creative professionals who are eligible to participate in this scheme. Even if you receive income from a foreign client in your foreign bank account, it will be taxed in India if you are a resident of India.

If you pay taxes on your foreign income in that foreign country, you can claim tax relief on that income (which was taxed twice) when filing your return in India under the DTAA signed between India and that foreign country.  Presumptive taxation is the use of indirect methods to calculate tax liability, in which taxable income is calculated using assumptions rather than actuals. In this case, the professional is required to declare a certain percentage of its gross professional income as income and pay a certain percentage of it as tax.

According to the Finance Act, 2016, professionals (as notified by the CBDT) having gross earnings of up to 50 lakhs for the fiscal year April 1st, 2016 to March 31st, 2017 can elect presumptive taxation. Also applies for all fiscal years following fiscal years 2016-17.

Presumptive Taxation under Income Tax Act, 1962

Section 44ADA provides for the presumed calculation of profits from profession.

Under the heading “Profits and gains of business or profession,” “an amount equal to or more than 50% of total gross revenues” will be judged to constitute the gain from such profession.

In other words, if a person is a designated professional with gross income of less than or equal to Rs. 50 lakhs, Sec 44ADA applies to him!

According to section 44ADA, he must give at least 50% of his gross earnings as profit, i.e. the amount on which tax would be charged. Alternatively, the government regards 50% of your gross earnings as costs and 50% as profit.

Benefits to File Returns under Presumptive Tax

The following are some benefits under Presumptive Tax:

• Simple to File: The tax form is significantly shorter and simpler to file than a lengthy 30 page ITR form.
• Save money: Instead of engaging a tax expert, professionals may now submit their own tax returns. Consultants often charge between Rs. 5000 and Rs. 15000 for such filings.
• Save Tax: Most professionals do not have a lot of costs to disclose. A lot of tax savings may be obtained by claiming 50% of income as profit and the remaining 50% as cost.

Claiming expenditures under 44ADA

Any deduction covered by sections 30 to 38, i.e. costs spent in relation to your business or profession, is presumed to have already been given effect, and no deduction under those sections is permitted. This implies that once income is offered for taxes under this clause, it is no longer possible to claim rent, transportation, telephone bills, and so on. However, deductions under Chapter VIA (Sec 80C, 80D, and so on) such as LIC, PPF, and Medical claim will continue to be permitted.

Presumptive scheme u/s 44ADA for Professionals

Section 44ADA allows some professionals to use this system to compute their taxable income. A taxpayer can provide 50% of their gross professional earnings as taxable profits under this arrangement. However, such a person may claim income in excess of 50%. If a taxpayer argues that his or her earnings are less than 50%, he or she will be forced to keep books of accounts and undergo a tax audit. A person who chooses the presumptive taxation plan is presumed to have claimed all costs. After claiming a profit of 50%, no further deduction claims are permitted.

Who is eligible for this scheme?

This plan is open to any resident individual or partnership firm engaged in certain professions. Non-residents, LLPs, and HUFs are not eligible for this plan. This plan is available to designated professionals with gross receipts of up to Rs 50 lakhs in a fiscal year.

Specified Professions as per Section 44ADA

Section 44ADA defines the following occupations as being eligible for the presumption scheme:

• Legal
• Health-related
• Architectural or engineering
• Accounting
• Technical assistance

Can IT professionals take advantage of the 44ADA presumptive scheme?

Yes, IT workers may take use of the presumption plan. U/s 44ADA The CBDT has often alerted professions that can profit from the presumed plan. The following people were notified:

• The authorized representative profession
• The occupation of film artists (actor, cameraman, director, music director, art director, dance director, editor, singer, lyricist, story writer, screen play writer, dialogue writer and dress designer)
• The Job of a Company Secretary
• The Information Technology Profession

Why is this scheme advantageous to the professionals who choose it?

Apart from assuming that taxable income is 50% of gross receipts/revenue. It has the following advantages:

• Does not require the keeping of books of accounts.
• Individuals that choose the programme can pay advance tax on or before the 15th of March of the fiscal year.
• Opting out of the programme is not restricted, unlike the 5 year restriction on enterprises opting for the presumed system under Section 44AD.

Presumptive Taxation Scheme for Freelancers/ IT Professionals

Over and above the presumptive taxation structure, all Section 80 tax-saving deductions and investments can be claimed. This Section 44ADA, Presumptive Taxation scheme is available to freelancers, professionals, and consultants who earn a living by delivering their services and knowledge.

But what if you kept good records and your net taxable income is less than half of your gross total revenue?

In this scenario, you should not use the presumptive taxation plan and instead pay tax on the taxable income after having your books audited. Such instances, though, would be uncommon. Freelancers and professionals typically do not have a large number of work-related costs to claim. As a result, the presumption that 50% of your entire income is profit works in their favor under Section 44ADA.

Takeaway

The Presumptive Taxation Scheme under Section 44ADA is a great alternative for IT professionals and freelancers since it decreases their compliance load. Your time and money spent on employing accountants are decreased to some extent.

This approach simplifies tax computation, which leads to increased tax compliance. In the last decade or so, India has seen a surge in the number of startups, freelancers, and self-employed individuals. Previously, the Presumptive Taxation system was closed to professionals (freelancers etc). However, with the advent of Section 44ADA, even professionals can now take use of the presumptive taxation provision. It is one of the most encouraging steps taken by the Income Tax Department to promote self-employment. How? Because it significantly improves the “ease of doing business” in India.

If you are freelancer/ IT Professional and looking for expert opinion on Presumptive Taxation Scheme, then Connect to our Expert at Legal Window.