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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. istock
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. istock

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

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

Eligible professionals ​​, freelancers and consultants can pay tax on half of their annual gross income. This can be done by opting for presumptive taxation scheme under section 44ADA​ of the Income Tax Act. Presumptive Taxation can help save taxes to a great extent. Presumptive Scheme under section 44ADA​​ is applicable only for resident assessee whose total gross receipts of profession do not exceed fifty lakh rupees. However such person can declare income higher than 50%.

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.


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