Article Summary: Section 44AD of the Income Tax Act simplifies tax compliance for small businesses by offering a presumptive taxation scheme. Eligible resident individuals, HUFs, and partnership firms (excluding LLPs) with a turnover up to ₹2 crores (or ₹3 crores for businesses with 95% digital receipts) can pay tax on presumed profits of 8% of turnover, or 6% for digital transactions received by the due date under Section 139(1). This eliminates the need to maintain detailed books or claim deductions under Sections 30 to 38. However, professionals, agents, or those earning brokerage are excluded. Assessees must pay advance tax by March 15 of the financial year. Depreciation on assets is deemed allowed under presumptive income calculations, and losses can be set off. Opting out of Section 44AD disqualifies re-entry for five years, and declaring profits below the prescribed rate (8% or 6%) triggers mandatory bookkeeping and audit requirements if income exceeds the basic exemption limit. This scheme aims to reduce the administrative burden for small businesses while ensuring tax compliance.
Introduction:
In India, tax compliance can often be a complex and time-consuming process, especially for small businesses and professionals. To ease this burden, the Income Tax Act provides a presumptive taxation scheme under Section 44AD, allowing eligible businesses to pay tax on a fixed percentage of their turnover rather than maintaining detailed books of accounts.
Non Applicability:
- A person carrying on Profession under section 44AA of the Income Tax Act.
- A person earning income is in the nature of commission or brokerage.
- A person carrying on Agency business.
Applicability:
Overriding Section 28 to 43C of the Income Tax Act,
If the Eligible Assessee* is conducting any Eligible Business**, then presumptive Income shall be equal to:
- 8% of Turnover, Sales, or Gross Receipts, or
- 6%, if the above receipts are by way of A/c payee cheque/DD or any other Electronic Modes. Further, the above amount should have been received on or before the due date as mentioned under section 139(1). If the above amount, even if received through banking channels, is received after the due date, then presumptive income shall be 8% of such receipts.
Thus, no other expenses/deductions under sections 30 to 38 are allowed.
*Eligible Assessee = Any Resident Individual, Resident HUF, or Resident Partnership Firm (Except LLP), who has not claimed any deductions under section 10AA or section 80IA to 80RRB.
** Eligible Business = Any Business (Except business mentioned under section 40AE), whose total turnover in the financial year does not exceed Rs. 2 Crores. (Rs. 3 Crores, if 95% of the receipts are through electronic mode)
Advance Tax:
The Assessee has to pay advance tax in one go, on or before 15th March of the Financial Year.
Written Down Value of Assets:
WDV of any asset shall be deemed to have been calculated as if the eligible business had claimed and been allowed depreciation for each relevant assessment year.
Setoff of losses:
Current year losses and Brought forward losses can be set off against the income deemed under this section.
Requirement of maintaining Books of accounts and Tax Audit:
Section 44AD(4) is attracted if any of the below-mentioned cases:
- Where the assessee declares profit less than the rate prescribed i.e. less than 8% or 6%. OR
- The assessee has opted out in any of the 5 years from the date of selecting 44AD. (Further, for the next 5 years the assessee will not be eligible to opt for Section 44AD presumptive scheme)
If in case of section 44AD(4) is attracted and Income exceeds the Basic Exemption Limit, then books of accounts are required to be maintained under section 44AA and get audited under section 44AB of the Income Tax Act.
Author Bio
