How Freelancers can Reduce Tax Liability by Filing Under 44ADA

Presumptive Taxation Scheme can be used by freelancers, professionals and consultants who earned INR 50 lakh or less in FY 2016-17
Guest Writer

If you are a freelancer, your salaried friends might envy you because you decide when and where you want to work, you decide who you want to work for and don’t have a boss breathing down your neck. But freelancing is hardly the walk in the park it seems to be. Right from getting work to finishing the work to getting paid on time for the work, freelancing comes with its own share of stressful situations.

Filing IT Returns can be Messy for Freelancers

And as if that wasn’t enough, there’s the whole tax filing bit to do as well. Salaried individuals have it easy because they have one source of income and one Form 16 to fetch all required information from. Freelancers, on the other hand, work with different clients and have numerous sources of income. All of this can lead to an extremely messy income tax return. But not if you file tax returns using the Presumptive Taxation Scheme under Section 44ADA.

What is the Presumptive Taxation Scheme?

This scheme was introduced in last year’s Budget and is applicable for Financial Year 2016-17 income, which is income earned between 1 April 2016 and 31 March 2017. This scheme can be used by freelancers, professionals and consultants who earned INR 50 lakh or less in the previous financial year. If your income was below this limit, the Presumptive Taxation Scheme can greatly reduce your tax filing headache. Here’s how:

  • It’s alright if you didn’t maintain books of accounts, you don’t need to show your profit and loss statements
  • Just calculate your total income and consider half of it as your profit
  • This half of your income is considered as your taxable income under this scheme
  • You can also claim Section 80 deductions to further reduce your taxable income
  • The ITR-4 form has to be used to file tax returns and it becomes easy to fill under this scheme

One thing to note is that you cannot claim deductions on business expenses if you file tax returns under Section 44ADA. When you use the Presumptive Taxation Scheme, you have to include your foreign income as well.

Let’s understand presumptive taxation further with an example assuming that your income for FY2016-17 was INR40 lakh. Without the presumptive taxation scheme, this is how your taxable income would be computed.

Taxable income without using presumptive taxation scheme

Total gross income for the year from various assignments and projects

INR40 lakh

Work-related expenses that you plan to claim as tax deductions

  • Travel expenses
  • Meeting expenses
  • Communication expenses

INR 10 lakh

Total taxable income (gross income - expenses)

INR 30 lakh

You would pay income tax on INR 30 lakh assuming that your business expenses were around INR10 lakh. But by availing the benefit of presumptive taxation, you can show your taxable income to be half of your gross income--that is INR 20 lakh.

Taxable income after availing presumptive taxation scheme

Total gross income for the year from various assignments and projects

INR 40 lakh

Presumed taxable income after availing presumptive taxation scheme

INR 20 lakh

The presumptive taxation scheme allows you to save tax on INR 10 lakh. This will translate into paying INR 3 lakh less as income tax. This is not only a major saving, but also much less of a hassle. You don’t have to bother about gathering all your invoices, receipts and bills. You don’t have prepare statements to figure out your profits. Just calculate your total income and consider half of that as your taxable profit. You can even do this by yourself without having to avail the services of a CA or tax expert, since filling the income tax return form also becomes easy.

This is how freelancers, professionals and consultants can use the Presumptive Taxation Scheme to greatly ease their tax filing process. It makes filing tax returns easier, allows you to pay tax on only half of your income and gives your salaried friends one more reason to envy you.

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