Presumptive Taxation | Section 44AD | Income Tax Act, 1961

Hello, in this post we will talk about the Presumptive Taxation under Section 44AD of the Income Tax Act, 1961. Businesses adopting the presumptive taxation scheme are not required to maintain regular books of account. They can declare the income at a prescribed rate.

The Income-tax Act has framed the presumptive taxation scheme under sections 44AD, sections 44ADA, sections 44AE., Section 44BB and Section 44BBB​.

A person adopting the presumptive taxation scheme can declare income at a prescribed rate and, in turn, is relieved from tedious job of maintenance of books of account.

Presumptive taxation schemes under Various Section of Income Tax Act, 1961

• Sec. 44AD:  Computation of income on estimated basis in the case of taxpayers [being a resident individual, resident Hindu undivided family or resident partnership firm (not being a limited liability firm] engaged in certain business subject to certain conditions.
• Sec .44ADA :  Computation of professional income on estimated basis for assessee being a resident in India and engaged in a profession referred to in Sec 44AA(1) subject to certain conditions.
• Sec 44AE : Computation of income on estimated basis in the case of taxpayers (being an Individual, HUF, AOP, BOI, Firm, Company, Co-operative society or any other person may be resident or non-resident) engaged in the business of plying, leasing or hiring goods carriages, subject to certain conditions.
• Sec 44B : Taxation of shipping profits derived by a person being a non-resident in India, subject to certain conditions.
• Sec 44BB :  Computation of taxable income of a person being a non-resident (may be an India citizen or a foreign citizen) from activities connected with exploration of mineral oils, subject to certain conditions.
• Sec 44BBA :  Computation of income in respect of foreign airlines, subject to certain conditions.
• Sec 44BBB :  Computation of profits and gains of foreign companies engaged in the business of civil construction, subject to certain conditions.

 Who can adopt the presumptive taxation scheme of section 44AD

​​​​​​​​The presumptive taxation scheme of Sec 44AD can be adopted by following persons

1) Resident Individual

2) Resident Hindu Undivided Family

3) Resident Partnership Firm (not Limited Liability Partnership Firm)

In other words, 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).

Example: ABC Pvt Ltd. is involved in the business of trading. It cannot opt for presumptive taxation scheme under Section 44A as private limited companies are not eligible under the provisions of the scheme.(Assume all other conditions are satisfied)

Further, this Scheme cannot be adopted by a person who has made any claim towards deductions under Sec 10A/10AA/10B/10BA or under Sec 80HH to 80RRB in the relevant year.

If you are opting for the presumptive scheme, you must-

1. File presumptive scheme for at least 5 years in continuation.

2. If you decide to show and file profits as per regular business before the end of these 5 years, you will lose presumptive benefits and disallowed from presumptive taxation for the subsequent 5 years.

Please note that 5 years shall be counted starting the year in which you first file usual taxes for such business.

Consequences of opt out from scheme before 5 year

​​​​​​​​If a person opts for presumptive taxation scheme then he is also require to follow the same scheme for next 5 years. If he failed to do so, then presumptive taxation scheme will not be available for him for next 5 years.

Example: Mr.A is involved in the business of trading and he claims to be taxed on presumptive basis under sec.44AD for AY 2019-20. For AY 2020-21 and 2021-22 also he offers income on basis of presumptive taxation scheme. However, for AY 2022-23, he did not opt for presumptive taxation Scheme. In this case, he will not be eligible to claim benefit of presumptive taxation scheme for next five AYs, i.e. from AY 2023-24 to 2027-28​.

Businesses not eligible for presumptive taxation scheme

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

• Business of plying, hiring or leasing goods carriages referred to in Sec 44AE.
• A person who is carrying on any agency business.
• A person who is earning income in the nature of commission or brokerage
• Any business whose total turnover or gross receipts exceeds two crore rupees.​

Example, Mr. A is a manufacturing concern. The annual turnover for the last year was Rs. 98 lakh. He can adopt the scheme of presumptive taxation under Section 44 AD to avoid tedious paperwork involved in filing taxes at the end of the financial year.

Computation of Income under presumptive taxation scheme of section 44AD

​​In case of a person adopting the provisions of Section 44AD, income will be computed on presumptive basis, i.e., @ 8% of the turnover or gross receipts of the eligible business for the year.

Income shall be calculated at rate of 6% in respect of total turnover or gross receipts which is received by an account payee cheque or draft or use of electronic clearing system or through such other electronic mode as may be prescribed​.

Income at higher rate, can be declared.

You don’t have to pay advance tax

Deductions in the presumptive taxation scheme

Under the normal provisions of the Income-tax Law, taxable business income will be computed after allowing deduction in respect of expenses which are deductible as per the Income-tax Act and after disallowing expenses which are not deductible as per the Income-tax Act.

In case of a person who is opting for the presumptive taxation scheme of Section 44AD, the provisions of allowance/disallowances as provided under the Income-tax Law will not apply and income computed at the presumptive rate of 8%/6% will be the final taxable income of the business covered under the presumptive taxation scheme and no further expenses will be allowed or disallowed. However, the assessee can claim deduction under chapter VI-A.

Deduction for Partnership Firm

If the assessee is a partnership firm, it can claim the deductions of interest paid to its partners and also the remuneration paid within the limits prescribed under Section 40 (b) of the IT Act.

For example: XYZ is a partnership firm engaged in the business of manufacturing. The firm has declared its income as per the provisions of the presumptive taxation scheme under Section 44AD. After computation of income on basis of estimation the firm wanted to claim further deductions on account of interest paid to its partners. XYZ Firm can claim deductions for the interest paid to partners as deductions of interest paid to its partners and also the remuneration paid within the limit prescribed under Section 40 (b) of IT Act are allowed as deduction under the presumptive taxation scheme.

Depreciation Calculation in presumptive taxation scheme Sec 44AD:

​While computing income as per the provisions of sec 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. It is necessary to calculate the depreciation for the purpose of computation of written down value of an asset used for a business or professional practice covered under the presumptive taxation scheme.

(The author can be contacted for further clarification at 9654182791 or via mail at caajay92@gmail.com. The author is the founder of Solution Tax (https://www.solutiontax.in) an platform for filing income tax returns, company incorporation, accounting/bookkeeping, audits related compliances etc.)

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