The income tax department has introduced a new section especially for people who want to follow their passion.
One of the most dynamic job amongst all is of freelancers. From working as a trainer, providing in-house support, becoming an online instructor, to simply following one's own heart and writing blogs, freelancers are everywhere. So, if you are a freelancer or are pondering over to become one of those amazing freelancers then this article is for you!
However, as quoted by Spider-man’s uncle, “With great power, comes great responsibility”. Your responsibility is to pay tax.
We want to share your responsibility and so does the government. Hence, the Income Tax Department has introduced a new section especially for people who want to follow their passion. Like always, we are here to help you navigate through the thick and thin of this new Section - 44ADA.
I have my own tax section? Am I supposed to feel special?
Yes, the Government of India has introduced a new section only for you. However, it’s not just another section, it’s a special section. The government is providing a benefit to the freelancers and professionals who don’t want to hire a chartered accountant and maintain those ever-confusing books of accounts. This special section is Section 44 ADA, which taxes your income on a presumptive basis.
What is presumptive basis?
Well, it is presuming that a portion of your total gross turnover are your profits. For freelancers and professionals, Section 44 ADA provides that 50 percent of the total gross receipts [or a higher sum as declared by you] of a financial year will be taken as profit and tax will be applicable on that amount. However, your total gross receipts should not be more than Rs 50 lakh.
For example, your total gross receipts are Rs 25,00,000 per annum. According to Section 44 ADA, your taxable income will be presumed Rs 12,50,000 i.e. 50 percent of the total gross receipts, and tax will be levied on it as per the rates given in the relevant tax slabs.
Alright, but what kind of professions can I choose to be eligible for this section?
So, freelancers or professionals engaged in the following professions are covered under this section:1. Legal
6. Technical Consultancy
7. Interior Decoration
8. Authorised representatives, Film Artists, Company Secretaries and Profession of Information Technology
9. Any other profession as notified by CBDT
Yes, it is all Sunshine!
Sections 44 ADA relieves you from the responsibility of maintaining the books of accounts and getting them audited from a chartered accountant.
What if your income is less than the presumed 50 percent of gross total receipts?
If you want to declare a profit less than the presumed 50 percent of receipts and your income exceeds the basic exemption limit of Rs 2,50,000. In that case, you are required to maintain books of accounts under Section 44AA(1) and get them audited under section 44AB.
Will I still be allowed deductions under other sections of the Income Tax Act?
Since, under this section, the government has presumed your taxable income, they also presume that all the deductions that are allowed under regular provisions have already been given. In other words, you will not be allowed depreciation and other expenses incurred in the regular course of your business.
Consider this, you have purchased a computer for Rs 60,000 and rented an office for Rs 20,000 per month. If you choose to be taxed as per the provisions of Sections 44 ADA, on the receipts of Rs 40,00,000, then your taxable income will be presumed to be Rs 20,00,000 (should you choose to declare your income higher than Rs 20 lakh, then the amount as declared by you) and no further deductions for the computer purchased and rent paid will be allowed on Rs 20 lakh so calculated.If my total gross receipt exceeds Rs 50 Lakh, what will happen then?
In such a case, you will have to compute your taxable income as per the normal taxation provisions and Section 28 to 43C will be applicable.
Take another example. You have billed your clients for Rs 60,00,000, i.e. more than Rs 50 lakh, then application of this Section will not be allowed to you and you will have to pay tax as per the normal provisions. However, you will get all the deductions like depreciation on your computer and rent and electricity charges paid for office, from your turnover to reach at taxable amount of income in this case.
Which ITR will I have to file for FY17 if I choose to opt for Sections 44 ADA?
You will be required to file a return of income under ITR-4 (Sugam), which is specifically given for people who have computed their income from business and profession on a presumptive basis. For FY17, ITR-4 should be filed by the July 31, 2017.
So calling out to all you freelancers out there. Pay your taxes tension-free and paint the world red with your talent!(The writer is co-founder of Tax2Win)