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Low tax incidence is the great benefit of being a lawyer in the country. Just contact any CA, tell him that you are not an employee but on retainer and basically in a service profession. And make sure you max out on your 80C exemptions.
of expenses. Any further claim of deduction is not allowed after declaring profit @ 50%. Then how does 80C apply along with 44ADA?
The retainer (gross receipt) is like the revenue of a company and your "income" is revenue minus expenses. Income tax is only applicable on income - and not on your retainership / revenue / gross receipt. I don't want to sermonise on what expenses you should or should not claim but legitimate expenses related to working as a lawyer can and should be claimed (for example, taxi rides late in the night post work which aren't expensed to a client is a valid expense). House rent, OTOH, is not a valid expense (during non-COVID times) even though the vast majority of firm lawyers show that as an expense. This concept is set out in S. 44ADA. [Note: As an aside, please don't get confused like 99% lawyers and start thinking that 44ADA presumes that 50% of your gross receipt is deemed to be an expense and so you effectively only pay income tax on 50% of your gross receipt. This is a common misunderstanding which even some CAs entertain.]
Every month the firm will deduct 10% of the retainer. The 10% deduction is pursuant to S. 194J of the Income-tax Act, 1961.
S 211(1)(b) is an exception to the general rule which allows "professionals" to pay the entire amount of advance tax by 15 March (as opposed to throughout the year for all other people). So, you have to pay the total tax due to the department by 15 March after accounting for the TDS already deducted by your firm. This is the reason you firm shares Form 16s with you.
For now, the old regime of slabs and deductions will be more beneficial to you. Which means, after you've reduced the expenses from the gross receipt, what is left is your income. For the first 10L, you will pay 1.25L and thereafter 30%. From this income, you can make some deductions permitted under the IT Act. Under 80CC, you can make deductions upto 1.5L and there are some other deductions available. Google that shit.
Due to the TDS and the expenses that you can deduct (this is year deducting house rent, mobile bill, and home internet bill will be a legally valid expense IMO) from your gross receipt; this effectively means that in the first couple of years (if you're in a Tier 1 firm and maybe till year 3-4 year if you're not in a Tier 1 firm) you won't have to pay any advance tax since the TDS already deducted through the year would be more than the tax you are liable to pay after considering the expenses from your gross receipt and deductions from the income.
An example is below:
Assumption:
Gross receipt is 25L.
TDS rate 10%
Old tax slab (because I remember that better)
Expense is 5L.
So, income is 20L (25-5) and total TDS deducted till and including for March will be 2.5L (because the tds is deducted on your gross receipt).
Assuming you've made no deductions (ELSS, PF, etc.), the tax that you're liable to pay is 1.25 for the first 10L and 3L on the next 10L.
So, total tax due is 4.25L. Net amount payable after considering TDS already deducted is 1.75L (4.25-2.5).
So, by 15 March, you would have to pay 1.75L as advance tax. Of course in real life, all of this gets a little more complicated depending on when you get your bonus and income arising from FDs or STCG in debt mutual funds, etc. etc.
- 44ADA: this uses the word "gross receipt". So I tried explaining how that's different from "income".
- 194J (and while you're at it, read the entire Chapter XVII, it'll help you to understand withholding tax negotiations (195 - 197) if you're a PE/M&A lawyer and TDS for securitization trusts if you're a debt lawyer). Its not a big chapter and you can skip a lot of the sections.
- 211: This says everybody has to pay "advance tax" (25% at the end of each quarter except "professionals"). It called "advance tax" because I pay tax at the end of each quarter basis what I think my income will be for the entire year. Lawyers (among others) have been given a dispensation from guessing what their annual income will be and then paying 25% at the end of each quarter - with the dispensation, you can figure what your income for the year will be by 15 March and pay the entire tax for the year by 15 March. So, it really simplifies things for lawyer.
While the original intention was in fact that 50% of the profits will be deemed to be the income of the assessee (see the union budget for 16-17), however, the drafting does not follow the budget speech and neither does the explanatory statement (see Para 38 of the linked explanatory statement), which only speaks of reducing compliance burden and then uses the same "50% or such higher sum" language.
As the stated intention in the explanatory note is to reduce compliance burden (and not tax burden). So, what 44ADA provides for is that professionals making less than 50L are exempted from keeping bundles of evidence and preparing a statement of accounts. The exception to this is when: (a) someone claims more than 50% of their gross receipt as expenses; and (b) when the gross receipt exceeds 50L; in which case the IT Dept wants you to get audited and retain the proof of your expenses.
Read Para 38 of the explanatory note to FA 2016: https://www.google.com/url?sa=t&source=web&rct=j&url=https://www.incometaxindia.gov.in/Communications/Circular/Circular03_2017.pdf&ved=2ahUKEwjE2qXU_abyAhU38nMBHST0BE0QFnoECCEQAQ&usg=AOvVaw1yo4TqZqTtkO3iqeHHc3MK&cshid=1628616699762
Read ITR3 (search for 44ADA): https://www.google.com/url?sa=t&source=web&rct=j&url=https://www.incometaxindia.gov.in/forms/income-tax%2520rules/2021/itr3_english.pdf&ved=2ahUKEwjC6ou9_6byAhWoxjgGHThwCCoQFnoECCMQAQ&usg=AOvVaw2mjkdv91kdWYpzyNX0Q_bz
https://www.incometaxindia.gov.in/Tutorials/13.%20Tax%20on%20presumptive%20basis%20in%20case%20of%20certain%20eligible%20businesses.pdf
"In case of a person adopting the provisions of section 44ADA, income will be computed on presumptive basis, i.e. @ 50% of the total gross receipts of the profession. However such person can declare income higher than 50%. In other words, in case of a person adopting the provisions of section 44ADA, income will not be computed in normal manner but will be computed @50% of the gross receipts."
Can you clarify in light of this?
"[...] an assessee [...] engaged in a profession [...] and whose total gross receipts do not exceed fifty lakh rupees in a previous year, a sum equal to fifty per cent of the total gross receipts of the assessee in the previous year on account of such professionor, as the case may be, a sum higher than the aforesaid sum claimed to have been earned by the assessee, shall be deemed to be the profits and gains of such profession chargeable to tax under the head "Profits and gains of business or profession."
My reading is that the section doesn't say a person can declare, at their discretion and without reference to facts, a lower income. Whether you have a higher income or not has to be premised on facts - the only benefit 44ADA provides is that the IT Dept cannot require you to provide evidence for your expenses if you have claimed less than 50% as expenses.
So, if you take the same example that I had first given. If I say my income is 12.5L (so, I claim expenses of 50% of my gross receipt of 25L) and I invest 15L in mutual funds in that year. Can I assert that my income was in fact 12.5L, when clearly, I have more than 15L saved from my gross receipt of 25L? I don't think so.
So, IMO the tutorial doesn't follow the section. I did find this instruction to file ITR 3 - see Page 13/152 (or search for 44ADA a few times) and it states:
"The presumptive income from the professional activity should be reported at column 62(ii), which is required to be computed @50% of gross receipts. In case you have actually earned income at the rates higher than the specified percentage of gross receipts (i.e. 50%), please note that you have to declare income at such higher rate."
Since this is a relatively new section, it will be interesting when the first case reaches the ITAT level. I had checked for 44ADA cases some time ago and couldn't find any relevant decisions. Those who practice tax, do let me know if you've come across any case law on this issue.
44ADA allows you to claim 50% of receipts as expense without any proof provided your income is less than 50%.
As long as you avoid saving more than 50% of your income in your bank account, which will be conclusive evidence of you faking your return, you will never have a problem.
Whatever your gross receipts are - say 4L per month. Do not save more than 1.9L per month in your own bank account / securities account / any savings that can be traced back with your PAN. Always prefer cash for your spends.
If you still have savings of say Rs. 2.9L pm, get 1L deposited in your parents' / trusted family member's account.
Whatever is left, do pay tax for it. Your country is being built by that money after all. :-)
The other issue with you solution (keeping aside the risks involved with giving your money to a person without documentation) is that if you deposit sums of monies in a relative's account, unless that relative is from your ascendent or descendant line, that money (above 50K) will be deemed to be such person's income under 56(2)(x). So, they'll be liable to income-tax in that amount and then when that person transfers the money back to you, then you will pay taxes on that.
Even if you transfer the monies to your own parents and they die without their will specifying that this cash must devolve upon you, then that will get split with your siblings.
It's a lot of risk while also being inconvenient for saving a piddly sum of money (since you've got to be
Related question, how do I get refund of TDS and is it worth the hassle? Can I file returns myself? If not, what do CAs typically charge in Mumbai for this?
(Context: Annual retainer pre-TDS is about 8 lakh. Maxed out my PPF (1.5lakh). TDS of 80k seems higher than my pre-expense tax liability of about 45k)
You can file ITRs on your own, especially from this year onwards (once the ITRs are available on the website). But I'll recommend cleartax - it's really simple and free (IIRC).
Wondering if you could elaborate a bit on Sec. 44ADA i.e., 50% of gross receipt is deemed to be an expense.
"As long as you avoid saving more than 50% of your income in your bank account, which will be conclusive evidence of you faking your return, you will never have a problem.
Whatever your gross receipts are - say 4L per month. Do not save more than 1.9L per month in your own bank account / securities account / any savings that can be traced back with your PAN. Always prefer cash for your spends."
I recently came across a comment which stated that retainers (aka our ctc) has the "ability to be exempted from tax".
Can someone explain how this works?
I am an incoming A0 and would love to learn/figure this out.