How 'presumptive taxation' can help bring down tax payable by a professional

A person who adopts the presumptive taxation scheme is deemed to have claimed all deduction of expenses. The Income Tax Act does not allow any further claim of deduction after declaring profit @ 50%.

Professionals who can avail the presumptive taxation include legal​ professionals, medical, engineers or architectures, accountants, technical consultants, interior decorators or, any other profession as notified by CBDT.

A person who is earning income in the nature of commission or brokerage cannot adopt the presumptive taxation scheme of section 44AD​. For an instance, an insurance agent earns income by way of commission and, hence, she cannot adopt the presumptive taxation scheme of section 44AD​ of the Income Tax.

How 'presumptive taxation' works?

Suppose a freelancer's annual income is ₹45 lakh, his work-related expenses are ₹7 lakh. Without presumptive taxation, the freelancer can claim tax deduction on work-related expenses, so her taxable salary would be ₹38 lakh ( ₹45 lakh- ₹7 lakh).

Using Presumptive Taxation, the freelancer's taxable income will be 50% of total annual income equal to ₹22.50 lakh.

There is a huge difference between the taxable income calculated in the two methods, which will bring a huge tax difference as well.

When 'presumptive taxation' does not work?

A freelancer or a professional is allowed to claim work related expenses as deduction. In cases where the work related expenses are more than 50% of the annual gross income, presumptive taxation will not work. Such an individual would pay even lower taxes by claiming deduction on work-related expenses.

The expenses should not be of personal nature.