Tax filing and Section 44ADA: Why presumptive taxation scheme might work for professionals

For state governments, tax devolution is a formula-linked and untied source of revenue, which they can spend according to their expenditure priorities.

Salaried employees receive Form 16 from their employers, which provides a comprehensive breakdown of the salary earned during the financial year. Large and well-established businesses typically have finance departments or chartered accountants to handle accounting and tax return filing. Similarly, individuals having capital gains from shares and mutual funds can access capital gains statements for tax return purposes.

However, many small businesses and professionals lack the resources, knowledge, or scope for proper bookkeeping. For such cases, the presumptive taxation scheme (PTS) offers a simplified way to file income tax returns. Let's look at what the PTS entails, who can opt for it, the advantages and disadvantages it offers, and the appropriate ITR form to use for filing income tax returns under this scheme.

Also read: Moneycontrol's all-you-need-to-know guide to filing income tax returns for FY 2022-23

What is a presumptive taxation scheme?

As per the Income-tax Act, 1961, businessmen and professionals must maintain regular books of accounts. They must also get their accounts audited and file income-tax returns (ITRs). However, in order to give relief to small taxpayers, PTS was introduced.

A person adopting this scheme to file the return can declare income at a stipulated percentage of gross turnover or receipts and, in turn, is relieved from the tedious job of maintenance of books of accounts and also from getting the accounts audited.

Also read: How salaried taxpayers should choose between ITR-1 and ITR-2

Who can opt for PTS?

PTS is not open to all. Only small businesses and professionals can make use of it.

The scheme is defined under three different sections—44AD, 44ADA and 44AE—of the Income-tax Act, depending on the type of businesses and professions. “Under the PTS of section 44AD, ITR can be filed by taxpayers engaged in any business if the total turnover or gross receipts from the business does not exceed Rs 2 crore for AY 2023-24,” said Sanjoli Maheshwari, Executive Director, Nangia Andersen India.

Under the PTS of section 44ADA, ITR can be filed by the resident taxpayers engaged in a specified profession, where total gross receipts from the profession do not exceed Rs 50 lakh for AY 2023-24, she added.
Here, “specified profession means a person resident in India engaged in legal, medical, engineering or architectural, accountancy, technical consultancy and interior decoration professions,” explained Maheshwari.

However, this doesn’t mean that people from other professions like contractual IT professionals, tuition teachers (academic, dance, or drawing), or those providing professional services from home cannot opt to file a return under the PTS. They can surely opt for PTS but as a business and not as a profession.

Also read: Income tax returns: Who should use ITR-3 and who shouldn't

“As regards to those providing professional services other than the specified profession as mentioned above, as such, the definition of the term ‘Business’ as defined in the Income Tax Act is an inclusive definition and includes any trade, commerce or manufacture and is wide enough to include activities involving time attention and labour for earning income, such activities can also be considered to come within the ambit of the term ‘Business’,” said Maheshwari.

Therefore, “considering the same, the resident taxpayers engaged in professions other than as specified profession i.e., IT professionals rendering routine services other than technical consultancy, providing tuitions (academic, dance or drawing) can consider to opt for the PTS under Section 44AD and file the return of income subject to the threshold limit as prescribed under the Act,” added Maheshwari.

Remember, the scheme is not available to all business people and professionals. The scheme cannot be adopted by a non-resident and by any person other than an individual, a HUF or a partnership firm (not Limited Liability Partnership Firm), including those having gross receipts or turnover above the specified limit.

Also, a person who is earning an income in the nature of commission or brokerage like an insurance agent or a mutual fund distributor cannot make use of PTS.

How is income calculated under PTS?

As the name suggests, the PTS calculates income based on presumptive factors. For individuals opting for section 44AD (business owners), income is determined presumptively at 8 percent of the turnover or gross receipts of the eligible business for the year.

However, if the turnover/gross receipts are received via an account payee cheque, an account payee bank draft, or electronic clearing systems through a bank account or other electronic modes, the income will be computed at a reduced rate of 6 percent instead of 8 percent.

Likewise, for professionals (under section 44ADA) choosing to adopt PTS, income is computed presumptively at 50 percent of the total gross receipts from their profession. Nevertheless, both business owners and professionals have the option to voluntarily disclose their income at a higher percentage than the prescribed rate and still choose to file their return under PTS.

Why PTS works

The major benefit of opting for PTS is that there is no need of maintaining the books of accounts. “Simplified tax compliance as there is no need to maintain books of accounts or get the books audited and eases the return filing process,” said Maheswari.

Besides that, while in other cases a taxpayer needs to pay advance tax in four instalments in a financial year, “taxpayers opting for PTS are not liable to pay advance tax on a quarterly basis vis-à-vis other taxpayers. Such taxpayers can pay 100 percent of advance by 15th March of the relevant financial year,” said Suresh Surana, Founder, RSM India.

Where PTS doesn’t work

If a person opts for PTS, then she should follow the same scheme for the next five consecutive years. If she fails to do so, then PTS will not be available for her for the next five years from the year in which she opts out.
Say you opt to file the return under PTS for AY 2023-24.

For AY 2024-25 and 2025-26 also, you offer income on the basis of PTS. However, for AY 2026-27, you do not opt for PTS. In this case, you will not be eligible to claim benefits of PTS for the next five AYs, i.e. from AY 2026-27 to 2031-32. Besides that, you would be required to keep and maintain books of accounts and would be liable for tax audit as per section 44AB from the AY in which you opt out from the PTS.

The other limitations under PTC include that the assessee is not allowed to claim any deductions for expenditure incurred. “No deduction can be claimed u/s 30 to 38 of the IT Act with regards to any expenditure incurred by the taxpayer. Such deduction would be deemed to have been already allowed,” said Surana.

However, the assessee can claim deduction under chapter VI-A, which includes deduction under sections 80C to 80 U of the Act. Also, there is no provision for the assessee under PTS to carry forward losses to subsequent assessment years.

Choosing the correct ITR form

The ITR forms vary depending on various factors, including for those who choose the PTS, for which there is a designated ITR form. “Taxpayers filing a return under PTS may furnish them in ITR-4 (Sugam),” said Surana. He added that ITR4 is a comparatively simpler form as compared to other ITR forms.