Freelancers, decode taxes! Section 44ADA simplified for you
What's the story
Freelancing is no longer just a side hustle—it's a booming career choice in India, with millions embracing the gig economy. But as flexibility meets income, the taxman's knock is inevitable! For professionals like designers, writers, and consultants, Section 44ADA of the Income Tax Act is a game-changer. This simplified tax scheme offers a clever way to declare earnings while keeping compliance stress-free. Let's dive into how freelancers can maximize benefits while staying on the taxman's good side.
Eligibility
Eligibility criteria under Section 44ADA
Section 44ADA applies to individuals engaged in certain professions, including accountancy, interior decoration, and technical consultancy, as designated by the CBDT. You are eligible if your gross receipts do not exceed ₹50 lakhs in a year. Eligible professionals can simply declare 50% of their gross receipts as taxable income, making tax calculations and filings easier.
Benefits
Benefits of opting for Section 44ADA
A significant benefit of choosing Section 44ADA is the decreased compliance burden. Freelancers are exempted from maintaining detailed books of accounts and audit procedures under this scheme, provided their income is below the threshold limit. This benefit greatly reduces the time and cost associated with maintaining financial records and fulfilling audit requirements.
Deductions
Deductions allowed under Section 44ADA
Freelancers choosing Section 44ADA have to declare a minimum of 50% of their gross receipts as income, but they can still claim deductions on expenses directly related to their profession. These deductions include rent, repairs, depreciation on assets used for business, and any other expense incurred exclusively for earning professional income. However, keep in mind that these deductions can't bring the declared income below 50% of gross receipts.
Considerations
Important considerations before opting in
Freelancers should evaluate if Section 44ADA aligns with their expense and income profile before choosing it. If you incur actual expenses >50%, you may benefit from lower taxable income under regular provisions due to deductible expenses. Choosing it and then opting out in a FY prohibits re-entry for five years, so caution is advised.