How to Pay Less Tax for Professionals and Small Businesses under Income Tax Act, Presumptive Taxation under Section 44AD and 44ADA

Presumptive Taxation under 44AD

There are small businessmen who are unable to keep and maintain books of accounts for various reasons, can opt for presumptive taxation and declare profits at 8% under section 44AD of Income Tax Act.  When the amount of total turnover or gross receipts are received by an account payee cheque or a bank draft or use of electronic clearing system through a bank account, the assessee can declare profits at 6%.

Eligible Businesses

Any kind of business can opt for presumptive taxation except the business of plying, hiring or leasing goods carriages and whose total turnover or gross receipts in the previous year does not exceed Rs.2 Crores.

Example: Suppose if the total turnover is Rs.1.5 Crores in a previous year, you can pay tax on the profit of Rs.12 lakhs (8% at Rs.1.5 Crores) or on the profit of Rs.9 lakhs (6% of Rs.1.5 Crores)

Presumptive Taxation undern Section 44AD and 44ADA

Eligible Assessees

The conditions to be eligible for presumptive taxations are:

  • Assesse should be a resident of India
  • Assesse can be an individual or HUF or a partnership firm but not LLP
  • Assesse, who has not claimed deduction 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

Ineligible Assessees

  • A person carrying on profession as referred to in sub-section (1) of section 44AA
  • A person earning income by way of commission or brokerage
  • A person carrying on any agency business

Presumptive Taxation under 44ADA

If you’re a professional, you can pay just half of income tax over your gross receipts based on presumptive taxation under section 44ADA and maintain no books of accounts, let us discuss about who is eligible and how it is applied:

Eligible Professions

The below professions are eligible to opt for the presumptive taxation:

  • Legal
  • Medical
  • Engineering
  • Architectural profession
  • Accountancy profession
  • Technical consultancy
  • Interior decoration
  • Any other profession as notified by the Board

Eligible Receipts and Computation of Tax

  • Total gross receipts should not exceed – Rs.50 Lakhs in a previous year
  • Computation of tax – Income tax is computed on 50% of total gross receipts

Example: Suppose your gross receipts for the previous year is Rs.30 lakhs, you can pay tax only on Rs.15 lakhs (50% of Rs.30 lakhs)

Opting out of Presumptive Taxation

If an assessee who declares that his profits and gains from the profession/business are lower than the income computed on presumption basis or when the income exceeds the limit, he shall be required to keep and maintain books of accounts as required under sub-section (1) of section 44AA and get them audited and furnish a report of such audit as required under section 44AB.

When an assessee opts for presumptive taxation under section 44AD, they need to continue this scheme for 5 years.  If he declares profit not accordance with the provisions of this section then he shall not be eligible for this scheme for the next 5 years from the year in which he declares profit not as per section 44AD.  This is no such restriction for the professions as per section 44ADA.

Important Points

  • Assessee should be a resident in India
  • Deductions under the provisions of section 30 to 38 shall be deemed to have been already given full effect
  • The written down value of any asset used for the purpose of profession/business shall be deemed to have been calculated as if the assessee had claimed and had been actually allowed the deduction in respect of the depreciation for each of the relevant assessment years

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June 2021