In order to reduce the tax burden and to provide relief to the small taxpayers from the tedious job of maintenance of books of account, getting the accounts audited and from tax compliance’s, the government of India incorporated a simplified scheme. The scheme of presumptive taxation under section 44AD of Income Tax Act.
The taxpayers are taxed at a rate prescribed under the scheme of Presumptive Taxation. Further, such eligible businesses are also offered exemption from yearly audit of their book of accounts. This saves a lot of time and the related compliance cost.
Eligibility criteria of Section 44AD
Small taxpayers for availing the benefit of Section 44AD of Income Tax Act will need to comply with a few eligibility criteria, provided that gross turnover is below Rs 2 crore.
The presumptive taxation scheme of section 44AD can be adopted by following persons -:
- Individuals who are Indian resident.
- Members of the Hindu Undivided Family who are Indian resident.
- Resident Partnership firm. (Limited Liability Partnership Firms are excluded in this regard)
Below are few assessee who cannot opt the scheme mentioned under section 44AD:-
- Any individual engaged in running an agency business.
- Person who is earning income in the nature of commission or brokerage.
- Persons who have claimed tax exemptions under Sections 10AA, 10A, 10B or 10BA along with Sections 80HH or 80 RRB during a given assessment year.
- Businesses included under Section 44AE, engaged in tasks like leasing, plying, and hiring of goods carriages.
Features of Section 44AD
Section 44AD provides an option to the assessee to choose between the normal provisions or opt for the presumptive scheme. The following features of the presumptive income scheme are as:-
- As per the provisions of the scheme, a sum equal to 8% of the total turnover or gross receipts of the assessee or a percentage higher than 8% shall be deemed to be the profits of such business.
- In order to promote digital transactions and to encourage businesses to accept digital payments, the rate of 8% has been brought down to 6%. Thus, in effect, assessee accepting digital payments can consider their deemed total income to be 6%. This is only applicable in a case where the amount of such turnover or gross receipts is received by:
1. Account payee cheque or account payee bank draft
2. UPI
3. RTGS
4. NEFT
5. Credit Card
6. Debit Card
7. IMPS
8. Net Banking
However, the assessee may voluntarily disclose his business income at more than 8% or 6%, as the case may be, of turnover or gross receipt.
- The assessee opting for the scheme will get exemption from maintaining books of accounts.
- Any person opting for the presumptive taxation scheme under section 44AD is liable to pay whole amount of advance tax on or before 15th March of the previous year.
- Those applying for benefits under this Section will need to file their income tax returns through ITR Form 4 – Sugam.
- If a person declare income at 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.
- In a case where an assessee opts for the presumptive scheme and declare profits in accordance with the scheme and does not declare the profits for any five consecutive assessment years, not in accordance with the scheme, he shall not be eligible to claim the benefit of the provisions for further five assessment years starting from the year in which profits were not declared in accordance with the scheme.
The same has been summarized in the table below:-
| Particulars | Presumptive Taxation under Section 44AD for Business |
| AY 2018-19, 2019-20 | Opts for Presumptive Taxation |
| AY 2020-21 | Does not opt for Presumptive Taxation |
| AY 2021-22 to AY 2025-26 | Cannot opt for Presumptive Taxation |
- Any assessee who chooses to file tax returns under Section 44AD, will not be allowed to claim any further deductions on any extra expenditure or depreciation incurred. 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.
Disallowances and Allowances of Section 44AD
- Any deductions allowable under the provisions of section 30 to 38 shall be deemed to have already been provided. The taxpayer cannot claim any further deduction in such a case.
- The Salary/ Remuneration/ Interest paid to Partners would also not be allowed to be claimed as a deduction
- No Disallowance as per Section 40, Section 40A, and Section 43B.
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