Presumptive Taxation Scheme Under Section 44AD of Income Tax Act

Concept of Presumptive Taxation under Section 44AD

To give relief to small or medium sized taxpayers, the income tax act incorporated scheme of presumptive taxation. Under this scheme of section 44AD the individuals who are running a business are not required to maintain books of account regularly. Individuals who adopt this scheme can declare their income at the rates prescribed in the scheme. They even don't have to get their accounts audited regularly.

Who are eligible for the applicability 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 Rs. 2 crores and 3 Crores if 95% of the receipts are the digital transactions.

Taxpayers who are restricted to adopt the presumptive taxation

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 profession has to be computed as per 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

There are few features and restrictions under this scheme for those who opt for presumptive taxation. They are:

• The assessee is not allowed deductions under section 30 to section 37 of the Income Tax Act.

Note-

The computation of written down value of depreciable assets that are used for the purpose of the business are to be calculated and deducted even under section 44AD.

• If a firm is a partnership firm, it can claim the deduction of interest paid to its partners but within the limits prescribed under section 40B of the Income Tax Act.

• Any deductions under section 40, section 40A, section 43B are not applicable for the firms who opt for presumptive taxation under the section 40AD.

Presumptive Taxation Scheme to be opted for five years

If an assessee has opted for presumptive taxation under section 44AD, then they are required to opt for the same scheme for a continuous period of 5 years. If, in any case, they fail to do so, then he/she will not be eligible to opt for the scheme for the next five years.

For example, Mohan has opted for Presumptive Taxation Scheme for the A.Y.2018-19 so Mohan is required to continue that scheme for the next 5 A.Ys. i.e. A.Y. 2018-19 to 2022-2023. If Mohan does not opt for the scheme in A.Y. 2020-21, then he is not eligible to opt for the scheme for the next 5 A.Y., i.e., A.Y. 2021-22 to 2025-26.

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?

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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