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Professionals to Avail Tax Exemption on Half of their Annual Income

22 May 2017 No Comment

Your income tax liability could devastate your dreams and you end up paying a huge share of your annual income as tax. The problem is no more there to put additional stress on your shoulders, in case you are a freelancer, consultant, or professional. Taxes are no longer to be calculated on your gross annual income.

If you are earning below 50 Lakh annually, then u/s 44ADA of the Income Tax Act, you need to pay income tax on half of your gross annual earning as per the Presumptive Taxation Scheme. Before you proceed to calculate your income tax as discussed above, you must know about the particular taxation scheme in detail.

Presumptive Taxation Scheme

The government of India recently introduced a new scheme that allows professionals (tax rebate under section 44ADA) to e file taxes declaring their 50% gross receipts (of not more than 50 Lakh) as annual income. They need to pay income tax on the balance amount, i.e. after deductions applicable under section 80D of the income tax act.

Important: Professionals eligible for deductions under this scheme can be interior decorators, technical consultants, advisors, and architects.

Tax calculation under presumptive taxation is done based on assumptions and not the actual figures of one’s income.

How to Calculate Income Tax?

In order to calculate income tax, professional needs to declare only a given percentage of the gross receipts that belong to his/her professional income and pay a certain percentage of it as the tax. In accordance with the Finance Act, 2016, professional with gross receipts up to Rs. 50 Lakh during the FY’16-17 is allowed to use Presumptive Taxation for e filing income tax.

Important: Only freelancers, consultants, and professionals are allowed to avail of the features of Presumptive Taxation Scheme (section 44ADA) who offer their expertise and services for their earning.

The Extent Professionals can save

For instance, let’s suppose your salary for the FY 16-17 was Rs. 40 Lakh, which after various deductions related to work of Rs. 10 Lakh, comes out to be Rs. 30 Lakh as the total taxable income. Read below to know more:

Table1.  Calculation of Taxable Income without using Presumptive Taxation Scheme

Gross income for the year, which is from various projects and assignments Rs. 40 Lakh
Total work-related expenses that are deductibles

·         Communication Expenses

·         Travel Expenses

·         Meeting Expenses

Rs. 10 Lakh
Taxable Income for the Financial Year 16-17 Rs. 30 Lakh

You can show you taxable income as half of the gross income (Rs. 20 Lakh) using presumptive taxation.

Table2.  Calculation of Taxable Income using Presumptive Taxation Scheme

Gross income for the year, which is from various projects and assignments Rs. 40 Lakh
Presumed taxable income as per the availability of presumptive taxation Rs. 20 Lakh

 

Without Presumptive Taxation Using Presumptive Taxation
Total Taxable Income – 30 Lakh Total Taxable Income – 20 Lakh
Calculation subject to Tax Slabs as in FY 16-17 Calculation subject to Tax Slabs as in FY 16-17
Income Tax Income Tax
Up to Rs. 2.5 Lakh NIL Up to Rs. 2.5 Lakh NIL
Rs. 2.5 Lakh to 5 Lakh Rs. 25,000 Rs. 2.5 Lakh to 5 Lakh Rs. 25,000
Rs. 5 Lakh to 10 Lakh Rs. 1,00,000 Rs. 5 Lakh to 10 Lakh Rs. 1,00,000
Rs. 10 Lakh to 30 Lakh Rs. 6,00,000 Rs. 10 Lakh to 30 Lakh Rs. 3,00,000
Total Rs. 7,25,000 Total Rs. 4,25,000

From the above table (Table2), it’s clear that you save Rs. 3 Lakh by using the Presumptive Taxation Scheme. In both the cases, a 3% cess is to be added to your taxable income.

e filing income taxtax rebate

 

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