This scheme is available only to a resident individual or a partnership firm engaged in a specified profession but not to a limited liability partnership.
The income tax laws offer a presumptive scheme of taxation for certain professionals. There are lots of doubts about what is the exact scheme and whether every professional can opt for it. I intend to explain the presumptive scheme of taxation for professional in this article.
What is presumptive taxation scheme
As per Section 44ADA of the Income Tax Act, specified professionals have the option to opt for a scheme under which they can offer 50% of their gross professional receipts as taxable profits from the profession provided the gross receipts from the profession does not exceed Rs 50 lakh in the relevant year. So, in case your gross receipts exceed this threshold limit, you cannot opt for this scheme.
If your net profits from the profession is less than 50% of receipts and you do not wish to offer the minimum 50% as your income, you can certainly do so, but in that case you will have to maintain your books of accounts and get those accounts audited from a Chartered Accountant for that year. However, you need not get your accounts audited in case total income from all the sources including the professional income does not exceed the amount of basic exemption limit. Presently the basic exemption limit is Rs 2.50 lakh for those who have not completed 60 years of age.
Who can avail this scheme?
This scheme is available only to a resident individual or a partnership firm engaged in a specified profession but not to a limited liability partnership (LLP). So, non-resident individuals and partnership firms or an HUF are not eligible to opt for this scheme.
It is not that all the self-employed not engaged in any business activity are entitled to opt for this scheme. It is only the eligible assesses who are engaged in the specified professions who can opt for this scheme. Only a few professions have been specified for this purpose. These specified professions include doctors, lawyers, Chartered Accountants, Company Secretaries, architects, engineers, technical consultants, interior decorators, certain persons engaged in the film industry, IT professionals, among others.
Due to sheer ignorance, many working as a consultant opt for this scheme without realizing that they are not eligible for this presumptive tax scheme. So, all journalists who are either working as freelancers or consultants are not eligible for this scheme. Likewise, all insurance advisors, mutual fund distributors or investment advisors cannot opt for this scheme. All the persons who are working as consultants with their ex-employer cannot opt for it unless they have the specified professional qualification.
Law as regards maintenance of books of accounts in case you opt for the scheme
In case you are eligible for this scheme and opt for it, the law exempts you from the requirement to maintain your books of account for that year. What it simply means that you are saved the hassles of writing the books of accounts as well as preserving the vouchers for expenses. However, in case you are registered under the Goods and Service Tax Act, you may still have to maintain your books of account and preserve the necessary documents. So, individual doctors and lawyers who are not covered under GST are fully free from the tedious task of maintaining the books of accounts.
Though you are exempted from requirement to maintain your books of accounts, but in my opinion, you will still have to preserve relevant records which can help you substantiate the amount of professional receipts claimed by you during the year.
What if your actual profits are higher than 50%?
In case your actual income from profession is more than 50%, in my opinion, you have to offer such higher percentage of your professional receipts as your professional income as the law does not just stipulate the fixed percentage but has provision for offering such higher percentage as your income. Since you are not required to maintain your books of accounts, it may be generally difficult to prove that your actual income is more than 50% of your gross receipts.
However, higher income can be easily established from the investments made and personal expenses incurred by you through the banking channel. So, for those who carry out their major transactions through the banking channel, it will not be possible to hide the fact of actual income being higher than 50% of gross receipts. So, before you decide to opt for the bare minimum percentage of 50% which you have to offer as income, have a look at the aggregate of investments made and personal expenses incurred by you during the year. Such concealed income may be taxed as unexplained amount at 60% along with interest and penalty in case the department is able to prove it conclusively.
Can I change the option later on?
From the current year a salaried person has the option to choose between the old tax regime, offering various deductions, exemptions, but with higher returns, and the new tax regime, without such exemptions and deductions but offering the lower rate, every year. However, as persons engaged in a profession or business cannot opt out of the new scheme once you have exercised the option until you cease to have the business income. However, in case of the presumptive scheme of taxation, a professional can exercise the option to have or not to have the presumptive taxation scheme every year.
I am sure the discussion will help you better understand the presumptive scheme of taxation for professionals.
(The author is a tax and investment expert, and can be reached at firstname.lastname@example.org)