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What is section 44ADA and how does it benefit freelancers?

In what comes as a relief to the freelancer community, the government in 2016 has added them in the ambit of presumptive taxation under Section 44DA of the Income Tax Act. Income tax for freelancers could now be levied on only half of their income without the need to maintain regular books of accounts. 

Let us understand with an example. Suppose you are a freelancer. You have earned ₹40 lakhs in FY 2016-17, and your expenses were ₹10 lakhs. Under regular taxation, you will be taxed on ₹30 lakhs (40 lakhs minus 10 lakhs). But under presumptive taxation scheme, you will only be taxed on ₹20 lakhs (50% of 40 lakhs). Let us find out how much tax you have saved. 

With or without presumptive taxation your income upto ₹2.5 lakhs is not taxed. Further, from ₹2.5 lakhs to ₹5 lakhs, your tax will be ₹25,000. From ₹5 lakhs to ₹10 lakhs, it will be ₹1 lakh. These will be the same in both cases. However, the next step is where you save money. The amount of income above ₹10 lakh under presumptive taxation, is ₹10 lakh, while without the same, is ₹20 lakhs. Hence, the tax on this income becomes ₹3 lakh and ₹6 lakh respectively. Add these to the first two steps, and you get a total tax liability of ₹4,25,000 with presumptive taxation and of ₹7,25,000 without presumptive taxation. You have saved ₹3,00,000. 

What is Section 44ADA?

Under Section 44ADA, the following professionals qualify for presumptive taxation if their gross receipts for the year don’t exceed ₹50 lakhs. 

  • Interior decorators
  • Technical consultants
  • Engineers
  • Accountants
  • Lawyers 
  • Medical practitioners 
  • Architects

Other professionals:
a. Film artists including a producer, actor, editor, director, art director, music director, singer, dance director, cameraman, lyricist, screenplay writer or dialogue writer, story writer, and costume designer. 
b. Authorised representatives 
c. Any notified professional other than these

Why is it suitable for freelancers?
  • Freelancers generally don’t have a lot of expenses. This scheme saves them the work of maintaining books of accounts. 
  • If their margins exceed 50%, they save tax as compared to regular taxation process.
  • Deductions under Section 80 can also be claimed over and above presumptive tax. 
  • Since the process is more straightforward, CAs are no more needed to file income tax for freelancers. This saves another cost. 

This scheme has given impetus to the ever-growing community of freelancers in India. 

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