Presumptive Taxation Scheme Sec 44ADA: An Efficient Tax Planning & Practical Guide for Eligible Professionals.
It was the House-Warming ceremony of my friend Neeta Sharma. She recently bought a spacious 3BHK luxury sea facing apartment in Mumbai. It was beautifully decorated by her Interior Designer –...
It was the House-Warming ceremony of my friend Neeta Sharma. She recently bought a spacious 3BHK luxury sea facing apartment in Mumbai. It was beautifully decorated by her Interior Designer – Ms. Shambhavi Patil. Every corner of the house was designed as per personal preferences of the owner with a subtle touch of creativity of the designer. I was truly impressed with the aesthetics of that apartment. It was at this ceremony where I met Shambhavi for the first time. A young talented lady age-38, who has established herself in home-decor space under the brand “Aashiyana” in the last ten years. It was a very casual meet but it turned into a long conversation as if we both knew each other.
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Through our conversation I came to know Shambhavi is a midsized Professional Interior Designer crafting her career on her own terms. She was looking for a professional guidance to support her personal finance journey. Our casual conversation turned into a formal meeting soon as she opted for Financial Planning service with me.
During our one-to-one discussion, I figure out that Shambhavi was successfully generating the gross revenue of about 48L p.a. with her Profession as Interior Designer but was more concerned with her current tax liability. She was able to handle her current professional needs with a team of 4 people supporting her. Sometimes she felt frustrated & burdened while keeping all the records of expenses related to her Profession. Currently she was incurring expenses about 36% of her Gross Receipts. She had opted for old tax regime & was claiming maximum allowable deductions under section 80C with Public Provident Fund Investment every year. Tax liability under old regime for Shambhavi was more than 7L p.a.
As a CFP, I suggested her to opt Presumptive Taxation Scheme u/s 44ADA as she was eligible for the same. She was not aware about this option. I made her understand that under the Income Tax Act 1961, there is provision to claim expenses up to 50% of the Gross Receipts with Presumptive Taxation 44ADA for Professionals like her. Shambhavi wanted to know more about the option that was suggested to her. Our conversation now turned into a Q & A session with her rising curiosity.
Shambhavi: “What is Presumptive Taxation Scheme Sec 44ADA can you please explain?”
Me: Section 44ADA is a special provision for calculating the taxable income for small professionals like you in certain circumstances. This scheme of taxation reduces the compliance burden on small professions and facilitates ease of doing business. Under the presumptive scheme of taxation, profits/taxable income is presumed at 50% of the gross receipts.
Shambhavi: That’s really great. Please tell me more who is eligible for this scheme of Presumptive Taxation?
Me: Persons engaged in the following professions are eligible:
- Interior decorators
- Technical consultants
- Engineering
- Accounting
- Legal
- Medical
- Architecture
- Other Professionals like movie artists include producers, editors, actors, directors, music directors, art directors, dance directors, cameramen, singers, lyricists, story writers, screenplay or dialogue writers and costume designers.
Shambhavi: What are conditions to meet to opt for Presumptive Taxation Scheme under section 44ADA?
Me: If you satisfy below conditions, you are eligible to opt for this Presumptive Taxation Scheme
- The profession’s gross receipts should be less than or equivalent to INR 50 lakh.
- The limit is increased to INR 75 lakhs if the total amount received in cash does not exceed 5 percent of the total gross receipts of such previous year.
In the ITR, the taxpayer must record 50% or more of the gross receipts as taxable income
Shambhavi: What are the Benefits of Section 44ADA?
Me: By following Section 44ADA, an assessee would get the following benefits:
- No need to maintain books required under Section 44AA
- No requirement to have accounts audited under Section 44AB
Shambhavi: How this scheme is beneficial to me please explain in detail?
Me: Ok. Let me help you understand this scheme in detail. Currently your expenses incurred to the professional service you provide are 36% of Gross Receipt. Your current tax liability is 36L as the income calculation is under Income Head Profits & Gains from Business & Profession. If you opt to this Presumptive Taxation scheme u/s 44ADA it will significantly reduce your professional expenses to 50% of your current Gross Receipts & your expenses will be now 24L instead of 36L this will result into reduction in taxable income. Further shifting to New Tax Regime will create higher post tax surplus income of about 5.5L per annum.
Me: Have a look into the below information especially tabulated for your ease of understanding.
Shambhavi: I was about to ask you the same! Let me glance through the summary.
Me: Sure
Shambhavi: It’s really impressive! I never thought of this. I can now think of utilization of these surplus funds towards my future business / personal needs.
Me: You are absolutely right but I have something more for you.
Shambhavi: What’s next I am eager to listen.
Me: My analysis of your existing financial situation concludes that apart from PPF you have not done any other provision towards your Retirement Plan.
Shambhavi: Yes, you are right. My Retirement is far away & think I will manage it later.
Me: Look Shambhavi, I really appreciate the efforts you are taking to build your career right now but you need to take care of Retirement Planning too. As you rightly said you have lot of time with you, believe me that’s the very important & positive aspect in your case. This Time factor combined with disciplined investing in appropriate assets has true potential to create a Retirement Funds for you of about 4.13 crore.
Shambhavi: How? Please explain to me.
Me: If you opt to presumptive taxation scheme u/s 44ADA you will have monthly surplus of Rs.45,000/- You need to begin an investment preferably through SIP (Systematic Investment Plan) with this surplus money. If you continue investing with this monthly SIP for the next 20 years till your Retirement Age in a growth asset you can build a Retirement Corpus of about 4.13 crore with 12% CAGR p.a. Below Table can help you understand this.
Shambhavi: It’s really impressive! I never thought of this. I can now think of utilization of these surplus funds towards my future business / personal needs.
Me: You are absolutely right but I have something more for you.
Shambhavi: What’s next I am eager to listen.
Me: My analysis of your existing financial situation concludes that apart from PPF you have not done any other provision towards your Retirement Plan.
Shambhavi: Yes, you are right. My Retirement is far away & think I will manage it later.
Me: Look Shambhavi, I really appreciate the efforts you are taking to build your career right now but you need to take care of Retirement Planning too. As you rightly said you have lot of time with you, believe me that’s the very important & positive aspect in your case. This Time factor combined with disciplined investing in appropriate assets has true potential to create a Retirement Funds for you of about 4.13 crore.
Shambhavi: How? Please explain to me.
Me: If you opt to presumptive taxation scheme u/s 44ADA you will have monthly surplus of Rs.45,000/- You need to begin an investment preferably through SIP (Systematic Investment Plan) with this surplus money. If you continue investing with this monthly SIP for the next 20 years till your Retirement Age in a growth asset you can build a Retirement Corpus of about 4.13 crore with 12% CAGR p.a. Below Table can help you understand this.
Shambhavi: I really didn’t think I could make this for my Retirement!
Me: Yes, it’s possible with disciplined investing. We often think wealth creation can be done with huge sum of money to start with but if you are able to start within your means & remained disciplined over a longer time, compounding does its magic. In your case you have longer time till your Retirement so you can start planning from today & be disciplined with your investing.
Shambhavi: Thank you so much for your guidance. It proved to be an eye-opening experience with significant learnings. I can now surely think of utilization of surplus funds in the direction of wealth creation.
Me: I am delighted to extend my professional service to you. Please make a note, you can file your income details with ITR-4 for AY-26-27 as applicable in your case. Please feel free to connect any additional service you need from myside.
Shambhavi: Sure noted. Thanks once again.
Me: You are welcome.
Conclusion
Conclusion
As a Planner our role is primarily involved in understanding the concerns of the client & we provide a practical feasible solution to them. I did the same for Shambhavi. Merely investing & relying with the safe assets won’t be enough to meet the retirement needs. A Planner’s professional guidance with deep understanding of the real needs of the client is crucial in achieving financial goals. We as Planners always look forward to extend our services to the needs of our clients in fiduciary manner.
Key Presumptive Taxation Sections:
Section 44AD – For Small Businesses
Applicable to resident individuals, HUFs, and partnership firms (excluding LLPs)
Turnover limit: up to ₹3 crore (if cash receipts ≤ 5%)
Presumed income:
- 8% of turnover (cash receipts)
- 6% of turnover (digital receipts)
Section 44ADA – For Professionals
Applicable to specified professionals (CA, Doctor, Lawyer, Architect, Consultant, etc.)
- Gross receipts limit: up to ₹75 lakh
- Presumed income: 50% of gross receipts
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