Decoding Presumptive Taxation Scheme For Freelancers

The word ‘Freelancers’ starts with ‘Free’. A freelancer is indeed free from the nitty gritty of a regular full-time job, but the aspect of paying taxes exists, like full-time employment. However, with the presumptive taxation scheme, they can still benefit from lower taxes.

Freelancers, independent professionals, and consultants are eligible for the presumptive taxation scheme. Under this scheme, freelancers pay only 50% of their gross annual income. The Government of India (GoI) has specially introduced this scheme under Section 44ADA of the Income Tax Act to ease the overwhelming burden of traditional accounting compliance and tax for freelancers in India.

Understanding Presumptive Taxation Scheme

The presumptive taxation scheme is an indirect approach to calculating a freelancer’s tax liability. Under 44ADA of the Income Tax Act, freelancers can base their tax liability calculation on assumptions rather than actuals. Since the tax calculations are based on assumptions, freelancers are not required to conduct an audit under this scheme.?

Here is a hypothetical example of how the presumptive taxation scheme works.?

Rani is a freelance Graphic Designer. In FY 2023-24, she earned a gross income of ?30 lakhs.?

Considering an expense of 6 lakhs for travel, meetings and communication, Rani’s total taxable income would be ?24 lakhs.?

However, under the presumptive taxation scheme, Rani’s presumed taxable income would be ?15 lakhs.?

Rani could save ?1,20,000 with a presumptive taxation scheme under section 44ADA of the Income Tax Act. Thus, it not only simplifies taxation, but reduces the burden of tax compliance and tax for freelancers in India.?

Eligibility Criteria for the Presumptive Taxation Scheme

The presumptive taxation scheme only applies to freelancers with up to ?50 lakhs of annual income.?

The calculation of presumptive taxation is different for specified and non-specified professionals. However, similar rules apply to freelancers in the selected or non-specified category.?

The list of specified and non-specified professionals is given in the table below:

There are certain freelancers who are ineligible for filing tax returns under the presumptive taxation scheme.?

These are freelancers earning income as brokerages or under the nature of the commission. Such freelancers are also not eligible for 44ADA of the Income Tax Act for ‘eligible businesses’ under specified or non-specified categories.?

Moreover, the Union Budget 2023 has amended the presumptive taxation limit for specified professions. With the amendment, specified category professionals can avail of the presumptive taxation scheme benefit for annual income up to ?75 lakhs, FY2023-24 onwards. However, this benefit can be availed only if 95% of the freelancer’s receipts are in digital format (online mode).

Calculation of Presumptive Income under section 44ADA

The calculation of presumptive taxation under sections 44AD and 44ADA is different. Here is a hypothetical example of income calculation under the presumptive taxation scheme.?

Sam is self-employed and runs a legal consulting business. Therefore, the presumptive taxation would be calculated according to section 44ad of the Income Tax Act.?

Sam’s gross business receipts were ?1.5 crores, of which ?70 lakhs were in non-digital or cash form, and ?80 lakhs were in digital form.?

So, after opting for the presumptive taxation scheme, his income under profession would be as follows:?

?70 lakhs non-digital payments * 8% = ?5.6 lakhs?

?80 lakhs of digital payments *6% = ?4.8 lakhs

Income from business or profession = ?10.4 lakhs

Some specific expenses and deductions can be claimed with the presumptive taxation scheme.?

Consider that Seema was a legal freelancer. She had a gross revenue of ?18 lakhs over a financial year. Her calculations would be based on section 44ADA of the Income Tax Act.

Seema’s expenses are as follows:

• Mobile and internet - ?25,000
• Staff salary for 2 staff members - ?5 lakhs?
• Office or premises rent - ?1.5 lakhs?
• Luncheon expenses - ?24,000?
• Travel expenses - ?1.5 lakhs?

Total expenses - ?8,49,000

Therefore, from her Gross Revenue or Receipts ?18,00,000 minus total expenses ?8,49,000. This would be equal to ?9,51,000, which is her net income. However, every expense needs to be supported by a receipt.?

Seema could claim deductions under Section 80 of the Income Tax Act and the presumptive taxation benefit.?

Advanced tax under Presumptive taxation scheme

If freelancers’ total tax liability exceeds ?10,000 per slab rate for a financial year, they must pay an advance tax.?

Advance tax must be paid every quarter, and a delay in payment would attract a penalty under sections 234B and 234C of the IT Act.

Presumptive taxation for international payment

Advertisers, technical consultants, interior designers, and architectural professionals are specified as freelancers who can benefit from the presumptive taxation scheme.?

The benefits of presumptive taxation would operate the same way (50% of your Gross Receipts) even in the case of international payments by foreign clients.?

How to Opt for a Presumptive Taxation Scheme

Freelance taxpayers must file Form ITR4 under income head PGBP to opt for the presumptive taxation scheme. They must specify the nature of their business with Business and Profession Codes while filing ITR4. If the taxpayer has income from capital gains and presumptive income, they should file Form ITR 3.

The freelancer would have to furnish receipts related to expenses, section 80 investment documents and TDS deducted and non-TDS deducted invoices while filing ITR4 or ITR3.?

Once the freelance professional has opted for the presumptive taxation scheme, they must continue to do so for the next five years. This is called the five-year rule.

Accounting and Auditing under Presumptive Taxation Scheme

A tax audit is unnecessary if a business’s gross receipts are less than ?3 crores in a financial year. Under section 44AA, enterprises need not maintain books of accounts if their gross receipts are below this threshold.?

Parting words

The presumptive taxation scheme is a hallmark scheme that eases the system of compliance and taxes for freelancers in India. It reduces tax computation and tax compliance norms for the benefit of freelancers.?

FAQs

• Do I need to maintain the book of accounts under the presumptive taxation scheme?

No, As per section 44AA, if your total business receipts are below ?3 crores in a financial year, you are not obliged to maintain books of accounts.?

• Can the 80C deduction be claimed under section 44ADA?

Yes, freelancers can claim section 80C deduction up to ?1.5 lakhs under section 44ADA of the Income Tax Act.

• Is 44ADA compulsory for up to 5 years?

Yes, 44ADA of the Income Tax Act comes with a 5-year rule. After opting for it once, opting for the presumptive taxation scheme for 5 years in a row is mandatory