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Guide on Presumptive Tax : The stress-free way for professionals to File Returns & Save Taxes | Company Vakil

Introduction:

Whether you are a professional, expert, or a freelancer, you can simplify your income tax payment on about fifty percent of your gross annual income. This can be easily achieved through the Presumptive Tax Scheme within the Income Tax Act Section 44ADA. The only requirement is that you should have a total yearly income of less than ₹50 lakhs.

Let’s break this accounting jargon using an easier to understand example.

Shweta is a successful model who earns ₹40 lakhs in the 2016-17 financial year which is usually between 1st April 2016 and 31st March 2017. ₹40 lakhs is a huge sum of money that attracts a lot of tax. Normally, without the use of presumptive tax, the taxable income of Shweta would be something like this:

Taxable income devoid of presumptive taxation scheme
Total annual gross income from various assignments and projects ₹40 lakhs
Expenses related to work that she intends to claim as tax deductions

  • Meeting expenses
  • Travel expenses
  • Communication expenses
₹10 lakhs
Total taxable income (gross income – expenses) ₹30 lakhs

Without presumptive taxation scheme, Shweta would remit an increased income tax on ₹30 lakhs. But with presumptive taxation, her taxable income payable will be half of her gross income–which is ₹20 lakhs.

Taxable income after taking the option of presumptive taxation scheme
Total annual gross income from various assignments and projects ₹40 lakhs
Presumed taxable income from using presumptive taxation scheme ₹20 lakhs

A tax savings of ₹10 lakh is achieved by using the presumptive taxation scheme. Let’s calculate the amount of tax she would save.

Without presumptive taxes With presumptive taxes
Taxable income – ₹30 lakhs Taxable income – ₹20 lakhs
Tax calculation as per chunks for financial year 16-17 Tax calculation as per chunks for financial year 16-17
Income Tax Income Tax
Up to ₹2.5 lakh ₹0 Up to ₹2.5 lakh ₹0
Between ₹2.5 lakh to ₹5 lakh ₹25,000 Between ₹2.5 lakh to ₹5 lakh ₹25,000
Between ₹5 lakh to ₹10 lakh ₹1,00,000 Between ₹5 lakh to ₹10 lakh ₹1,00,000
Between ₹10 lakh to ₹30 lakh ₹6,00,000 Between ₹10 lakh to ₹20 lakh ₹3,00,000
Total ₹7,25,000 Total ₹4,25,000

As shown in the table above, Shweta will succeed in saving ₹3 lakh in taxes with the use of the presumptive taxation scheme. This further implies that she will need to pay ₹3 lakh less as income tax. However, a cess charge of 3% would be included to the taxable income in both cases.

In addition, all Section 80 tax-saving investments and deductions can also be collected over the presumptive taxation scheme.

Under Section 44ADA the scheme can be used by professionals, experts, and freelancers who earn income through the provision of services and expertise.

However, if proper account record is kept and you find your net taxable income less than half of your total gross income, it implies that Shweta’s work-related expenses were higher with her taxable income reducing to ₹15 lakh. This is more than fifty percent less than half of her total gross income. In cases like this, you should rather go for the taxable income rather than the presumptive taxation scheme after getting your account books audited.

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However, cases like this are few and rare. Typically, professionals and freelancers do not have many work-related expenses to claim. Hence, they are better served to pay the presumption of 50% of their total income which is their profit under Section 44ADA.

The inclusion of foreign income

This aspect seems so confusing for creative professionals. Whether their income made from foreign clients is taxed in India or not? The answer is unequivocal ‘YES.’ As a resident of India receiving income in India, you will definitely have your global income taxed in India.

What is Presumptive Taxation?

The government has presented a new presumptive taxation scheme under Section 44ADA which mandates professionals to file their return stating 50% of their gross incomes (up to ₹50 lakhs), and after section 80 deductions, professionals are required to remit tax on total balance income. The resourceful professional’s eligible for this scheme includes architects, technical consultant, interior decorator or advertiser.

As a resident of India, receiving income from a foreign client into your foreign bank account still makes you liable for taxation. However, you can claim tax relief if you pay taxes on your foreign income in that foreign country.

Presumptive Taxation has to do with the use of indirect tax liability computing methods whereby taxes are calculated based on assumptions rather than actuals. Here, the professionals is expected to state a given percentage of gross professional income as its income and remit a fixed percentage of it as a tax. According to the Finance Act 2016, professionals (as stated by CBDT) with gross income of up to ₹50 Lakhs within the period of 1st April 2016 to 31st March 2017, can go for presumptive taxation.

Three Benefits of filing Returns under Presumptive Tax

  1. Easy to File: You have a much shorter and simpler tax form compared to a complex 30 pages ITR form for filing.
  2. Save Money: Professionals now have the chance to file tax returns on their own without having to pay a tax consultant. Consultants typically charge between Rs. 5000 – 15000 for such filings. CompanyVakil offers the same service at a much lesser rate.
  3. Save Tax: Most professionals usually don’t have much expense to declare. A lot of tax saving is achieved by declaring 50% of income as profit and balance as an expense.

What if you have a day job, but you do freelancing as a side-work?

Most times we are faced with the situation whereby a salaried employee also has additional freelance or consulting work. In such a scenario, are they permitted to benefit from the presumptive taxation scheme? The answer is unequivocal yes.

Having a salaried job and also doing freelance work qualifies you to have two kinds of incomes (salary and non-salary income). Since they are both regarded to as income, you have to pay tax on both. Computing of tax on the salary income is done regularly. Your freelance income needs to be included in this salary income to work out your total annual taxable income. While this is done, you can make use of presumptive taxation and include only fifty percent of your freelance income to your salary income.

For example, if you earn ₹20 lakh from your salary and your freelance income is ₹10 lakh; presumptive taxation can be used whereby you add half of the freelance income to your total income. This way, your total annual income will be ₹25 lakh.

Note that in such a case, you will need to use ITR-4 to file your income tax returns.

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