Did you know that if you work freelance, you are allowed to pay taxes on only half of your yearly income? Are you a freelancer? With the presumptive taxation scheme, you can actually pay taxes only on half your income for the year. In this blog, I will tell you everything you need to know about the presumptive taxation scheme for professionals.
To give relief to small taxpayers, the government introduced the presumptive taxation scheme under sections 44AD and 44ADA so they don’t have to maintain books and have to pay much less tax if they don’t make more than Rs. 50 lakhs a year. What is this scheme and how can you benefit from it as a professional? Together, let’s find out all about the presumptive taxation scheme for professionals.
What is presumptive taxation?
Presumptive taxation is a new taxation scheme by the government. So under section 44ADA of the Income Tax Act, if you are a professional making 50 lakhs a year or less, you can file your income tax return declaring only 50% of your gross receipts as your income, then deduct the section 80 deductions, and then pay tax on what is left of your total income this way. So if you are a professional- like an architectural professional, an interior decorator, an advertiser, or a technical consultant, you can use this scheme to cut your tax bill by a big amount. So really, you are paying tax on your income based on assumptions instead of reality. You just need to declare a certain percentage of gross receipts of professional income as your income and then pay a fixed percentage of it as tax.
So why should I go for this scheme?
Okay, look at it this way. Say you make 40 lakhs a year as a freelance wedding photographer. Now even if you claim 10 lakhs as deductions for all the expenses that went into the business- all the travel, equipment, and other expenses, you still have to pay tax on the remaining 30 lakhs. This means you will pay taxes of rupees seven lakhs twenty-one thousand and five hundred. Now that’s a lot! But if you opt for the presumptive scheme, it’s like your profits were only 20 lakhs, so you only pay taxes on the 20 lakhs. So that’s rupees four lakhs twelve thousand and five hundred in taxes. Wow, she just saved 3 lakhs in taxes!
AND on top of that, you can also take all the deductions available under section 80 of the Income Tax Act. So if you are a freelancer, professional, or consultant making money by providing your services and expertise, the presumptive taxation scheme is a great option for you.
What are the benefits of this scheme?
While, by now, it’s obvious how this scheme could help you save lakhs in taxes, there are three main benefits to choosing this scheme:
- It makes it easier to file taxes. Because otherwise, you first have to figure out which ITR form to fill out of the seven forms there are, and then the forms are also longer, like around 30 pages. The tax form for the presumptive scheme is shorter and much simpler.
- And because these forms are much simpler, you can easily fill them yourself instead of paying anywhere from around Rs. 5000 to 15000 to a tax consultant to do it for you.
- And of course, the biggest one- you save a lot of tax! You literally save lakhs in taxes with this scheme by declaring 50% of your income as profit and the balance as expenses.
Also, if you go for this scheme, you don’t really have to maintain your books of accounts for that year. You won’t have to save receipts. Although, you still may have to do all that for GST. But if you ask me, it’s always better to save your receipts and maintain your books. You should also know that if you are under the presumptive scheme, you may not have to pay advance tax every quarter, but you still do need to make sure that you pay all your advance taxes on or before 15th March of a financial year.
This scheme sounds great. Should I just go for it?
Wait! While this is a really great option to save tax, you have to stop and think. Is it possible that you have a lot of expenses towards your income? So like if you have a lot of work-related expenses that could bring your taxable income down to Rs. 15 lakhs, and you have maintained your books of accounts properly, it would be a much better idea than to use the presumptive scheme that would only bring your total taxable income down to Rs. 20 lakhs. So if that is the case, it is better to not go for the presumptive taxation scheme. But to be honest, this doesn’t happen a lot.
What if I have a job and I also do freelance work?
If you have a regular day job and also do some freelance work in your free time for the extra cash, you can still benefit from this scheme. If you have opted for the presumptive taxation scheme, you can still cut your tax away a lot. So in that case, you will have to pay tax on your salary income according to whatever tax slabs you fall under. And for whatever income you earn from the freelance work, you only have to add half of it to your salary income to calculate your total income. So even though the scheme does not apply to your salary income, it will still apply to your freelance income. Like if you make 15 lakhs from your job and 10 lakhs working as a freelancer, you only have to pay tax on 20 lakhs, not on 25 lakhs.
Okay, great. So how do I know if I am eligible for this scheme?
According to Finance Act 2016, if you are a professional with gross receipts of up to Rs. 50 lakhs for a financial year, you can opt for this scheme. You can go for this scheme if you are a resident individual or a partnership firm involved in a certain profession but not to an LLP. But if you are a non-resident individual, an HUF, or a partnership firm, you are not eligible for opting for this scheme. So for example, if you are a doctor, a lawyer, a chartered accountant, a company secretary, an architect, an engineer, a technical consultant, an interior decorator, someone in the film industry, an IT professional, or in one of the other listed professions, you are eligible for this scheme. Journalists, insurance advisors, mutual fund distributors, and investment advisors cannot go for it. So before you opt for the presumptive scheme, go ahead and check if you are eligible for it.
So once I opt for this scheme, will I always be under this scheme or am I allowed to go back?
Although earlier, once you switched to this scheme, you weren’t allowed to switch back. But now, every year when you’re doing your taxes, you have the option to choose between the old and the new tax regimes. So while the old tax regime has many deductions and exemptions, but with higher returns, the new regime has fewer exemptions and deductions, but offers lower rates.
So while it’s great to have the option of a presumptive taxation scheme to save on tax, sometimes, it’s just not for you. It’s good to weigh your options instead of just doing what your friends are doing. But if you do it right, you can really end up saving lakhs in taxes!
Isn’t the presumptive taxation scheme something? Check out my videos where I have explained some great ideas about how to file your taxes and also save lakhs on them! You could also check out one of my memberships on this space where I talk about legal ways to literally save lakhs of rupees on taxes without breaking any rules. See you at the channel!!