The income tax department allows certain “professionals” to pay tax only on 50% of their total income on a presumptive basis under section 44ADA of the IT act (t&c apply)*. However, there is plenty of confusion on who is eligible to file returns under ADA and who is not. A discussion.
Disclaimer: No part of this article should be treated as taxation advice. Kindly consult a CA if you need guidance to file returns.
* Important! If the actual net income (gross income minus expenses) is greater than 50% of gross income then only the actual net income (the higher amount) is taxable! The ITR form is clear about this!!
Who is eligible to file IT returns under section 44ADA?
- Only resident individuals; Hindu Undivided Family; Partnership firms other than LLP quality.
- Annual gross income should be less than Rs. 50 lakhs.
- The IT dept. mentions the following professions as eligible.
- Legal
- Medical
- Engineering or architectural
- Accountancy
- Technical consultancy
- Interior decoration
- Any other profession as notified by CBDT. These include authorized representatives, film artists, sports persons, company secretaries and information technology (independently employed).
Allowed 44ada business codes in ITR4 (or ITR3) under “profession”
- Software development 14001
- Other software consultancy 14002
- Data processing 14003
- Database activities and distribution of electronic content 14004
- Other IT enabled services 14005
- BPO services 14006
- Maintenance and repair of office, accounting and
- computing machinery 14008
- Legal profession 16001
- Accounting, book-keeping and auditing profession 16002
- Tax consultancy 16003
- Architectural profession 16004
- Engineering and technical consultancy 16005
- Fashion designing 16007
- Interior decoration 16008
- Photography 16009
- Business and management consultancy activities 16013
- Secretarial activities 16018
- Film Artist (applicable from AY 20-21) 16020
- Medical Profession (applicable from AY 20-21) 16019_1
- General hospitals 18001
- Speciality and super speciality hospitals 18002
- Nursing homes 18003
- Diagnostic centres 18004
- Pathological laboratories 18005
- Medical clinics 18010
- Dental practice 18011
- Ayurveda practice 18012
- Unani practice 18013
- Homeopathy practice 18014
- Nurses, physiotherapists or other para-medical practitioners 18015
- Veterinary hospitals and practice 18016
- Medical education 18017
- Medical research 18018
- Practice of alternative medicine 18019
- Other healthcare services 18020
- Individual artists excluding authors 20010
- Literary activities 20011
- Other cultural activities n.e.c. 20012
For professions explicitly listed, the applicability of 44ADA is not much of an issue. Today there are so many new professions where individuals directly use their expertise to assist others direct or indirectly. So the interpretation is subject to a lot of debate. The same applies to our reading of the rules.
For example, “Engineering and technical consultancy 16005” or “Business and management consultancy activities 16013” can refer to several professions. The ITR form has a description box for details. We recommend consulting with a CA before filing. That said, different CAs have different opinions and interpretations!
Thumb rule: Can you “fit” your profession in the above categories and provide a truthful and logical justification to the IT department? If yes, you can opt for 44ADA. However, be prepared to justify your stand if there is an enquiry and pay extra tax if they are unconvinced.
- Take for example a financial advisor. Can she opt for 44ADA? Since she is engaged in technical consultancy, she can.
- How about a freelancer or a digital marketer? Both these are broad and vague terms so we will have to be careful.
- A person offering SEO services can opt for 44ADA under technical or managerial consultancy. They should be ready to justify this to the IT dept.
- A person offering social media ad management services may not be able to since “advertising 16006” is not a listed option.
- A person doing odd jobs on Fiverr eg. minor website modifications, content writing etc. will have a tough time justifying the use of 44ADA and therefore we recommend against it.
- A person offering a variety of services (a small “business”) can opt for filing returns under 44AD instead of 44ADA. Section 44AD can be more favourable depending on your expenses. Again a CA is the best judge here.
- I am a blogger, vlogger or content creator can I use 44ADA for my earnings? No. It is meant for professionals offering their services to specific entities. At least that is our opinion. It may be possible to justify your activities under “distribution of electronic content” – whether the IT dept. will accept this or not is unknown.
- How about those who have income from commissions or brokerage – affiliate marketing, insurance sales, mutual fund sales etc.? Again they will not come under the category of “professional” and cannot use section 44ADA. In fact, the IT act says “A person who is earning income in the nature of commission or brokerage cannot adopt the presumptive taxation scheme of section 44AD” also.
- My net income after expenses is higher than 50% of the gross income. Can I still only show 50% of the gross income as taxable? No! Taxation is based on the honour system. Under section 44ADA 50% of gross income is the lower limit of taxability. If your net income is higher then only that should be reported. The same applies to section 44AD also (in this case the lower limit is 6% of gross income for digital payments and 8% for cash payments, but if the actual net income is higher then only the actual amount should be entered. The ITR form is clear about this).
In summary, section 44ADA is applicable only to professionals earning an income via their expertise. To opt for this section, your profession must fall under certain categories and you must be able to provide a truthful and logical justification to the IT department. In the case of unconventional or new professions be ready for an enquiry. For certain situations, opting for section 44AD may be better (eg. high overheads) and more appropriate instead of 44ADA. Please consult a CA in this regard.
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