Presumptive Taxation Scheme | Income Tax | Section 44AD

For reducing the income tax burden and for providing relief from tedious taxation work to the small taxpayers, the Indian government incorporated the presumptive taxation scheme under Section 44AD. Taxpayers opting for the presumptive taxation scheme can declare their income at the prescribed rate and aren’t required to maintain the books of accounts.

As per Section 44AD, small taxpayers with a turnover less than INR 2 crore can declare their profits at 8 percent of their turnover, and where the income is credited digitally, the profits will be considered at 6 percent. It is important to note that if a taxpayer opts for the presumptive taxation scheme, he won’t be allowed to avail any deduction provided under Section 30 – Section 38.

Let’s understand this section with the help of an example. Mr. Rakesh is running a firm and the gross receipts from his business were INR 90 lakhs. Mr. Rakesh opted for presumptive taxation scheme under Section 44AD and declared his income INR 7,20,000. Mr. Rakesh wanted to claim deductions for depreciation related to his firm’s building under Section 30. However, according to Section 44AD, computed presumptive income is considered as the net income for his business and he isn’t allowed to claim any further deductions including depreciation or unabsorbed depreciation under Section 30-38. Hence, Mr. Rakesh after opting for presumptive taxation scheme cannot claim any deductions to lower the so computed income.

Conditions you need to meet for opting presumptive taxation scheme under Section 44AD?

1. You must file presumptive scheme for 5 years continuously.

2. In case you wish to file your income as per regular business before the expiry of the said 5 years, you would lose the benefits of presumptive taxation scheme and will be disallowed this for the subsequent 5 years.

3. Presumptive taxation scheme under Section 44AD, isn’t allowed for the following business

• Business referred to under Section 44AE i.e. business of plying, hiring, or leasing of goods carriages.
• Agency business.
• Business of earning income which is in the nature of brokerage or commission.
• Engaged in any profession as provided under Section 44AA (1).

4. Only the below assesses can adopt this scheme:

• Resident Individuals
• Hindu Undivided Families (HUF)
• Partnership Firm (except LLPs)

Declaring Lower or Higher Income under Presumptive Taxation Scheme | Income Tax | Section 44AD :

In case, the taxpayer’s actual business income is less than his declared presumptive income i.e. 8% or 6% of his total turnover, then there’s no relief on maintaining books of accounts. That implies, if the taxpayer’s actual business income is less than his presumptive income, then the taxpayer is required to maintain his books of account in accordance with Section 44AA. Further, he is also required to get his books of accounts audited in accordance with Section 44AB. In case, the taxpayer’s actual business income is higher than his declared presumptive income, this Section allows the taxpayer to declare such higher income at his option.