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 in 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 the Section 44AD are:
  • Any business
  • The business whose annual turnover and the gross receipts in the previous financial year does not exceed the limit of Rs. 2 crores.
Example:

Mrs. X has a small departmental store. The annual turnover of her store for the financial year 2015-16 was Rs. 80 lakh. She is eligible to adopt the scheme of presumptive taxation under Section 44AD so that she can avoid tiring paperwork that is involved during the time of filing taxes at the end of the financial year.


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 to individual incomes.
  • The companies involved in hiring, leasing goods carriages, agency business or playing 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 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 existing rate of calculation of presumptive income is done to encourage small businesses to accept the 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.

Example: Mr. Y has a shop of grocery whose annual turnover of previous financial year was Rs. 90 lakh. He is eligible to gain benefits of presumptive taxation under section 44AD. He adopts the provisions of this scheme for taxation in his business. The income will be calculated with the estimation method as his turnover was less than the limit that is mentioned as Rs 2 crores. The rate at which it will be computed is 8% of his total turnover.
In his case, the presumptive income will be 8% of 90, 00,000= Rs. 7,20,000
Note:
  • If in any case the 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.
For example- If Mr x has a firm with an annual turnover of Rs 80 lakh for last financial year. He opts for presumptive taxation and compute his presumptive income to be 8% of 80 lakh which is equal to Rs. 6,40,000. He wants to claim a deduction for depreciation of the building under section 30. But as per the regulation of income tax act 1961, he is not eligible to claim this deduction as he opted for presumptive taxation.
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.
    For example- If a firm is opting for presumptive taxation under section 44AD and is complying with all the rules and regulations of the scheme, then the company is eligible for claiming deductions for the interest paid to the partners within the limits mentioned under section 40B.
  • 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 5 years

If an assessee has opted or presumptive taxation under section 44AD, then he/she is required to opt for the same scheme for a continous period of 5 years. If, in any case, he/she failed to do so,then he/she will not eligible to opt for the scheme for the next 5 years.

Example, Mohan has opted for scheme for the A.Y.2018-19 so, Mohan is required to continue that scheme for 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.

For example: Mr. Manik is running a stationery store. His annual turnover for the previous year is Rs. 50 lakh. He opted for presumptive taxation scheme under Section 44AD. In this case he is not liable to maintain the books of account related to his business nor to get his accounts audited as per the regulations mentioned in Section 44AD.

Payment of Advance Tax under Section 44AD

An assessee is liable to pay his or her advance tax in a single instalment on or before the 15th of March of every financial year if he or she opts 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 the 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.


Conclusion

We can sum up from the above brief discussion that presumptive taxation scheme under Section 44AD is a great benefit to small or medium sized taxpayers. This is because they do not have to do the tedious job of maintaining books of account and getting it audited for the purpose of taxation under the income tax act 1961. This helps in saving the time as well as saves the assessee from high probability of errors.

Frequently Asked Questions

Q- What does eligible business refers to under section 44AD?

Any business whose annual turnover or gross receipts in the previous year is less than Rs. 2 crores. The business can be any business except playing, hiring, agency business and more.


Q- What is the meaning of presumptive taxation?

Any small or medium sized business can opt this scheme and get relief from maintaining and auditing their books of accounts. The presumptive income will be computed on the basis of the estimation of the previous years turnover or gross receipts.


Q- How is the presumptive income calculated?

The estimation of presumptive income is done at the rate of 8% of the total turnover or gross receipts of the last year.
If the transactions of the business is done digitally this rate changes to 6% of the total turnover or gross receipts.


Q- If an assessee adopts presumptive taxation, is he required to maintain books of accounts?

If a taxpayer adopts presumptive tax scheme, he or she is not required to maintain any books of accounts under section 44AD. He or she just have to declare his or her presumptive income on the basis of 6% or 8% (as applicable)of the total turnover or gross receipts of last year.


Q- Is Section 44ad applicable to companies?

Ans. No, Sec 44AD applicable to only to Individual/HUF/Partnership.


Q- Is 234b and 234c applicable to 44ad?

Ans. Taxpayer paying tax under presumptive scheme then only one installment is their to pay advance tax.


Q- Is commission income covered under 44ad?

Ans. Commission income is not covered under 44AD.


Q- Can section 44ad and 44ada be used together?

Ans. Yes both the section can be used together.


Q- How is income computed on presumptive basis under Section 44AD of Income Tax Act?

Ans. As per the provisions under Section 44AD, computed presumptive income taking 6% or 8% of gross receipts or turnover of the eligible business for the previous year.


Q- Is it possible for an individual declare his profit under Section 44AD?

Ans. Yes individual can declare his income u/s 44AD.


Q- Who is eligible to get the benefit under Section 44AD?

Ans. Person eligible to get benefit are Individual/ HUF/ Partnership firm other than LLP.


Q- Will an insurance agent be allowed to adopt the presumptive taxation scheme?

Ans. Insurance agent is allowed to adopt the presumptive scheme.


Q- How is taxable business income calculated in case of a person adopting the presumptive taxation scheme of Section 44AD?

Ans. computed presumptive income taking 6% or 8% of gross receipts or turnover of the eligible business for the previous year.


Q- What are the conditions associated with lower income or higher income?

Ans. Under Presumptive income scheme taking 8% of gross receipts or turnover.


CA Abhishek Soni

Abhishek Soni is a Chartered Accountant by profession & entrepreneur by passion. He is the co-founder & CEO of Tax2Win.in. Tax2win is amongst the top 25 emerging startups of Asia and authorized ERI by the Income Tax Department. In the past, he worked in EY and comes with wide industry experience from telecom, retail to manufacturing to entertainment where he has handled various national and international assignments.