Presumptive Taxation under section 44AD of Income Tax Act

To give relief to small taxpayers from the tedious job of maintenance of books of account and from getting the accounts audited, the Income tax Act has framed the presumptive taxation scheme.

Some of the very commonly used sections of this scheme are:

Sections 44AD: Special provision for computing profits and gains of business on a presumptive basis for Eligible Bussiness

Section 44ADA: Special provision for computing profits and gains of profession on a presumptive basis for professionals

Section 44AE: Special provision for computing profits and gains of business of plying, hiring or leasing goods carriages

In this article, we will Discuss Presumptive Taxation under section 44AD.

You May Also Refer: Presumptive Taxation under section 44ADA Scheme for Professionals

Presumptive Taxation Scheme of Section 44AD

For whom the presumptive taxation scheme of section 44AD is designed?

The presumptive taxation scheme of section 44AD is designed to give relief to small taxpayers engaged in any business (except the business of plying, hiring or leasing of goods carriages referred to in section 44AE).

The presumptive taxation scheme of section 44AD can be adopted by the following persons:

1) Resident Individual
2) Resident Hindu Undivided Family [HUF]
3) Resident Partnership Firm (not Limited Liability Partnership Firm)

Exceptions to the scheme:-

1. The scheme cannot be adopted by a non-resident and by any person other than an individual, a HUF or a partnership firm (not Limited Liability Partnership Firm).

2. This scheme cannot be adopted by a person who has made any claim towards deductions under sections 10A, 10AA, 10B, 10BA or deduction under any provisions of Chapter VIA under the heading C – Deductions in respect of certain incomes in the relevant assessment year.

3. The scheme of section 44AD is designed to give relief to small taxpayers engaged in any business, except the following businesses:

• Business of plying, hiring, or leasing of goods carriages as a relief has been specifically given in section 44AE.
• A person who is carrying on any agency
• A person who is earning income in the nature of commission or brokerage

4. A person carrying on a profession where Maintenance of accounts by certain persons carrying on profession or business is required as per Section 44AA(1) is not eligible for a presumptive taxation scheme.

5. An Insurance Agent cannot adopt the presumptive taxation scheme of section 44AD

6. A person whose total turnover or gross receipts for the year exceed Rupees two crore rupees cannot adopt the presumptive taxation scheme of section 44AD

Turnover threshold limit:-

The presumptive taxation scheme of section 44AD can be opted by the eligible persons if the total turnover or gross receipts from the business do not exceed Rupees two crore rupees. In other words, if the total turnover or gross receipt of the business exceeds Rs. 2,00,00,000 then the scheme of section 44AD cannot be adopted.

Manner of computation of taxable business income under the normal provisions of the Income-tax Act, i.e., in case of a person not adopting the presumptive taxation scheme of section 44AD

Generally, as per the Income-tax Act, the taxable business income of every person is computed as follows:

Tax Rate:-

Transactions other than an account payee cheque or an account payee bank draft or use of electronic clearing system through a bank account 

In case of a person adopting the provisions of section 44AD, income is computed on the presumptive basis at the rate of 8% of the turnover or gross receipts of the eligible business for the year.

Transactions through an account payee cheque or an account payee bank draft or use of electronic clearing system through a bank account 

In order to promote digital transactions and to encourage small unorganized business to accept digital payments, section 44AD is amended with effect from the assessment year 2017-18 to provide that income shall be computed at the rate of 6% if gross receipt is received by an account payee cheque or an account payee bank draft or use of electronic clearing system through a bank account or through such other electronic mode as may be prescribed during the previous year or before the due date of filing of return under section 139(1).

Hence, in the case of a person adopting the provisions of section 44AD, income will not be computed in the normal manner as discussed earlier (i.e., Turnover fewer Expenses) but will be computed @ 6% or 8%, as the case may be, of the turnover or gross receipt.

However, a person may voluntarily disclose his business income at more than 8% or 6%, as the case may be, of turnover or gross receipt.

Notes:-

1. No Deduction of Depreciation Allowed

While computing income as per the provisions of section 44AD, separate deduction on account of depreciation is not available. However, the written down value of any asset used in such business shall be calculated as if depreciation as per section 32 is claimed and has been actually allowed.

2. No need to maintain books of account as prescribed under section 44AA.

Payment of advance tax in respect of income from business covered under section 44AD

Any person opting for the presumptive taxation scheme under section 44AD is liable to pay the whole amount of advance tax on or before 15th March of the previous year. If he fails to pay the advance tax by 15th March of the previous year, he shall be liable to pay interest as per section 234C.

Note: Any amount paid by way of advance tax on or before 31st day of March shall also be treated as advance tax paid during the financial year ending on that day.

Provisions to be applied if a person does not opt for the presumptive taxation scheme of section 44AD and declares income at a lower rate, i.e., at less than 8%

Requirement of Tax Audit

A person can declare income at a lower rate (i.e., at less than 6% or 8%), however, if he does so, and his income exceeds the maximum amount which is not chargeable to tax, then he is required to maintain the books of account as per the provisions of section 44AA and has to get his accounts audited as per section 44AB.

Consequences if a person opts out from the presumptive taxation scheme of section 44AD

If a person opts for a presumptive taxation scheme then he is also required to follow the same scheme for the next 5 years. If he failed to do so, then a presumptive taxation scheme will not be available for him for the next 5 years. [For example, an assessee claims to be taxed on a presumptive basis under Section 44AD for 2021-22. However, for AY 2021-22, he did not opt for a presumptive taxation Scheme. In this case, he will not be eligible to claim the benefit of the presumptive taxation scheme for the next five AYs, i.e. from AY 2022-23 to 2026-27.]

Further, he is required to keep and maintain books of account and he is also liable for tax audit as per section 44AB from the AY in which he opts out from the presumptive taxation scheme. [If his total income exceeds the maximum amount not chargeable to tax]