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.
The taxpayers are divided in two cases to make clear the eligibility criteria under this section for the scheme of presumptive taxation.
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.
Note: The individual can declare an income higher than the presumptive income as per the scheme in his or her income tax return.
There are few features and restrictions under this scheme for those who opt for presumptive taxation. They are:
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 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.
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.
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.
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.
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.
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.
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.
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.
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.
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