Section 44AD of the Income Tax Act: Presumptive Taxation Scheme

Concept of Presumptive Taxation under Section 44AD

To give relief to small or medium-sized taxpayers, the Income Tax Act allows eligible small taxpayers to declare income on a presumptive basis, thus avoiding the burden of maintaining books of accounts and audits. Instead of calculating actual profit, a fixed percentage of turnover is assumed as income, and taxes are paid accordingly, or not paid at all if the income falls under the taxable threshold after rebates.

A similar scheme under Section 44ADA applies to professionals like doctors, lawyers, and architects, but with different conditions.

Presumptive Taxation Limits

The limits under the presumptive taxation scheme for FY 2024-25 (AY 2025-26) are as follows -

Note: This increase in the limits is only applicable in cases where over 95% of the transactions are made in digital form. This means, the cash transactions of the business should not exceed 5% of the total transactions.

Who is Eligible Under Section 44AD?

The taxpayers are divided into two cases to make clear the eligibility criteria under this section for the scheme of presumptive taxation.

Individuals

The individual taxpayers who can avail the benefits of the scheme of presumptive taxation under Section 44AD are:

• Any individual resident
• Resident partnership firms ( except for Limited Liability Partnership Firms LLP)
• Resident Hindu Undivided Families (HUFs)

Businesses

The businesses who are eligible to gain the benefits of the scheme of presumptive taxation under Section 44AD are:

• Any business
• The business whose annual turnover and the gross receipts in the previous financial year do not exceed the limit of 3 Crores if 95% of the receipts are the digital transactions.

Who is Not Eligible Based on Business Type?

Some of the exceptions to this scheme under the section 44AD are as follows:

• Individuals who have claimed deductions under Section 10A, Section 10AA, Section 10BA, Section 10B, or other deductions in respect of individual incomes.
• The companies involved in hiring, leasing goods carriages, agency business, or playing are referred in section 44AE.
• Individuals or firms involved in any sort of profession, in which the income is earned in terms of commission or brokerage ( professionals can adopt the scheme of presumptive taxation under Section 44ADA).

Computation of Income and Presumption of Rates of Income under Section 44AD

• Under the scheme of presumptive taxation, the eligible taxpayer has to compute his income on the basis of estimation. The presumptive income is calculated at the rate of 8% of the annual turnover or the gross receipts of the business of the last financial year.
• However, as per budget 2018, If the gross receipts or annual turnover is received through an account payee cheque or draft or any electronic device, then the presumptive income will be calculated at the rate of 6% of the annual turnover of the last year. This is done with the aim of promoting digital transactions. This special provision of reducing the existing rate of calculation of presumptive income is done to encourage small businesses to accept digital payments and become organized, and use the electronic clearing systems by a bank.

Note: The individual can declare an income higher than the presumptive income as per the scheme in his or her income tax return.

Note:

• If an individual is running more than one business, the turnover of all businesses are required to be considered to check that he or she is eligible to adopt presumptive taxation scheme under Section 44AD or not.
• If the assessee is dealing in both professional practice as well as business, then the criteria of presumptive taxation under Section 44AD can only be adopted for the business. In this case, the income from the profession has to be computed as per the regular regulations of the Income Tax Act, 1961.
• If an assessee is adopting presumptive taxation under section 44AD, he or she can even claim tax deductions under Section 80C to Section 80U.

Features of Presumptive Taxation under Section 44AD

Section 44AD was introduced specifically for small businesses having a turnover within specified limits. This section simplifies the process of tax filing for small businesses and reduces the compliance requirements.

• Applicable to Small Businesses: Section 44AD is applicable to resident individuals, partnerships (excluding LLPs), and HUFs who are engaged in eligible businesses having a turnover of Rs. 3 crore.
• Presumptive Income: Taxable income is presumed to be 8% (for less than 95% digital transactions) or 6% (for more than 95% digital transactions) of the total turnover
• No Detailed Accounting Required: Businesses opting for the presumptive income scheme are not required to maintain proper books of accounts or get them audited.
• No Deduction of Expenses: Also under this scheme, the businesses cannot claim further deductions for expenses paid, such as rent, salaries utilities.
• Advance Tax: Taxpayers under section 44AD need to pay the entire advance tax by March 15 of the financial year. This eliminates the requirement for quarterly payments.
• Five-Year Rule: Once a business opts for the presumptive income scheme, it has to follow it for five consecutive years. If the business opts out of the scheme before completing 5 years, it cannot opt for it again for the next five years.

Maintenance of books of account under section 44AD

The major provision related to presumptive taxation is to give relief to small or medium-sized taxpayers from maintaining books of accounts. The individual or firm who adopts presumptive taxation under section 44AD is not liable to maintain books of accounts. They are also not required to get their accounts audited under this scheme.

Payment of Advance Tax under Section 44AD

An assessee is liable to pay his or her advance tax in a single installment on or before the 15th of March of every financial year if they opt for presumptive taxation under Section 44AD. For any default in paying the advance tax, the assessee will be charged interest under Section 234C.

What are Taxable Profits and Gains?ins?

As per section 44AD, an assessee who opted for presumptive taxation will compute his income as 8% of the total turnover or gross receipts of the last year. An amount higher than the previously computed amount as presumptive income claimed by an assessee shall be termed as gains and profits of the business that is chargeable to tax under the head "Profits and gains of business or profession."

Note: An assessee can claim lower profits or gains if he has maintained proper books of account and gets his accounts audited and furnish the audit report mentioning lower profits.

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