How presumptive tax will benefit Freelancers in India

May 12, 2016 by Prakarsh -

Finance Minister of India, Mr Arun Jaitley, recently announced in his Budget 2016 speech that Freelancers and consultants in India will now be able to take benefit of presumptive tax under Section 44ADA of Income Tax Act. Under this scheme, freelancers and consultants in India will be able to declare 50% of their gross receipts as their profit and pay taxes accordingly. They won’t need to maintain any books of work-related expenses which otherwise they needed to maintain for eight years even after filing the Income tax returns.

How will presumptive tax benefit Freelancers and Consultants in India

The presumptive tax scheme will benefit individual freelancers in India and consultants in India who don’t really have many work-related expenses to furnish and, therefore, end up paying taxes on almost 100% of their gross receipts.

Furthermore, another good news is that the Income tax will be filed by filling ITR 4S instead of lengthy and complicated ITR 4, where freelancers had to furnish all their work-related expenses under various headers, maintaining which was another tedious task.

However, there was no waiver given on the 10% TDS which will be deducted as usual under Section 194J of Income Tax Act, which is a bit discouraging for the part-time freelancers (including work from home freelancers) whose Gross receipts won’t go above 5 lacs (50% of which will be counted as their income, ie 2.5 lacs). Since people in India are exempted from paying Income Tax if their Income is below 2.5 lacs, therefore holding 10% of their income as TDS doesn’t makes much sense. 10% on a Gross Receipt of 5 Lacs makes Rs 50,000, which is a huge sum for someone earning less than 2.5 lacs per annum, isn’t it Honorable Finance Minister? While TDS deduction is important to track the transaction, the 10% TDS amount can fairly be lowered down to 1% TDS amount as in case of Section 194C.

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Since when will this scheme be applicable?

Since Mr Arun Jaitley announced this scheme in his Budget 2016 speech, this scheme will most probably come into effect from the Financial year 2016-17, subject to Parliament of India’s assent. Although there may be some minor changes in the scheme as it goes through the Parliament.

What Exactly is Section 44 ADA of Income Tax Act?

The benefit of Presumptive Tax, which was earlier available only to specified businesses, has now been extended to Professionals (Including Freelancers in India and Consultants in India). Professionals whose Total Gross Receipts do not exceed more than Rs. 50 Lacs in a Financial year can benefit from this Section from Financial Year 2016-17 onwards. The Income of any person making use of this Section would be assumed to be 50% of the Total Gross Receipts for the concerned year. The following are considered as professionals who will be able to leverage this Section:

Engineering
Medical
Legal
Architectural Profession
Technical Consultancy (Including Freelancers and Consultants)
Interior Decoration
Profession of Accountancy

This scheme is applicable only to a resident assessee who is an Individual, HUF or Partnership but not a Limited Liability Partnership (LLP) firm or a Private Ltd. Under this scheme, the assessee would be deemed to have been allowed the deductions under the Section 30 to 38. Accordingly, the written down value of any asset used for the purpose of the profession of the assessee would be deemed to have been calculated as if the assessee had claimed & had actually been allowed the deduction in respect of depreciation for the relevant assessment years. It’s also proposed that the assessee will not be required to maintain books of accounts under sub-section (1) of Section 44 AA and get the accounts audited under Section 44 AB in respect of such income unless the assessee claims that the profits and gains from the aforesaid profession are lower than the profits or gains deemed to be his income under sub-section (1) of section 44 ADA and his income exceeds the maximum amount which is not chargeable to income tax.

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