Income Tax: Half of your income could be tax exempt if you are a professional

Are you a freelancer, professional or consultant? Then, you do not need to pay income tax on full gross annual income!

If your salary is less than 50 lakh, then using the Presumptive Taxation Scheme under Section 44ADA of the Income Tax Act, you can actually pay income tax on only half of your gross annual income.

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Before giving you the calculation, it is important to know what is Presumptive Taxation Scheme?

According to ClearTax, for professionals, government has introduced a new scheme of presumptive taxation (Section 44ADA), under which professionals can file their return declaring 50% of their gross receipts (which must be up to Rs 50 lakhs) as income, and after deducting section 80 deductions, professionals need to pay tax on balance total income. 

The creative professionals who are specified to be eligible to opt for this scheme are architectural professional, interior decorator, advertiser or technical consultant.

Presumptive Taxation involves the use of indirect methods to compute tax liability, where the taxable income is calculated based on assumptions instead of actuals. 

CALCULATE YOUR INCOME TAX HERE

"Here, the professional is required to declare a given percentage of gross receipts of professional income as its income, and pay a fixed percentage of it as tax. As per Finance Act 2016, professionals (as notified by CBDT) with gross receipts up to Rs 50 Lakhs for the period April 1st, 2016 to March 31st, 2017, can opt for presumptive taxation," ClearTax explained. 

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This presumptive taxation scheme under Section 44ADA can be availed by freelancers, professionals and consultants who earn an income by providing their services and expertise.

How much professionals will save?

For instance, your salary in FY17 was Rs 40 lakh. Which means after deducting work related expenses, that is around Rs 10 lakh, Rs 30 lakh will be the total taxable income.

Now, if you avail the benefits of presumptive taxation, you show taxable income half of gross income, that is Rs 20 lakh. 

Clearly, from the above table, by using presumptive taxation scheme, you will save Rs 3 lakh in taxes. However, 3% cess would be added to the taxable income in both cases.

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But what if you maintained proper books of accounts and your net taxable income is less than half of your gross total income? This would mean your work-related expenses were higher and your taxable income came down to Rs 15 lakh. This is lesser than half of the total gross income. In such a case, you should not avail the presumptive taxation scheme and pay tax on the taxable income after getting your books of account audited.

Further, as per ClearTax, if you  receive income from a foreign client in your foreign bank account, even then it will be taxed in India, if you are an Indian resident. If you are paying taxes on your foreign income in that foreign country, then you can claim tax relief on taxed income (which was taxed twice), while filing return in India as per DTAA, entered between India and that particular foreign country.

Whether the income they make from a foreign client is taxed in India or not? The answer is ‘YES’. As an Indian resident, you are receiving income in India, hence your global income will be taxed in India.

So, if you are a professional, then do not forget to use benefits under Presumptive Taxation Scheme.