Section 44AD of Income Tax Act: Presumptive Taxation Under 44AD Income Tax
The Government of India has launched presumptive taxation under Section 44AD of the Income Tax Act to relieve the small taxpayers’ burden. Earlier, they had to do the tedious job of maintaining account books and getting accounts audited.
This is a special provision for computing profits and gains of businesses that allows businesses to avoid regular audits and maintenance of books of accounts. Any business except those involved in leasing, hiring and plying can apply for the presumptive scheme.
Want to get an overview of this Section? Stay in this article!
Conditions Under Section 44AD of Income Tax Act
Earlier, Section 44AD of the income tax act included all the assessees being Indian residents. After Budget 2021, it applies to the Hindu Undivided Family (HUF), resident individuals or partnership firms, except LLP.
The Income Tax Department substitutes sub-section (4) of 44AD with an additional condition. If individuals are opting for this presumptive taxation scheme, they must do the following:
- Declare their gains according to this presumptive scheme for 5 consecutive years.
- If an individual decides to showcase and file gains under regular business (ITR-3) prior to the end of 5 years, he/she will lose presumptive tax benefits and be dismissed from the scheme for the upcoming 5 years.
For example, Mr Mehta opts for this scheme during FY 2018-2019. He claims to come under presumptive taxation for 2021-2022. However, he had not opted for this scheme for the assessment year 2019-20. In this case, he cannot claim the presumptive benefits from assessment years 2020-21 to 2024-25.
The conditions restrict the taxpayers from frequently changing their options and misusing the scheme. As per Budget 2016, any business with a turnover of up to Rs. 2 crores can select presumptive taxation.
Also Read: Income Tax Slab Rates
Application of Section 44AD
Section 44AD covers all businesses except those involved in leasing or renting goods. If the payer falls under the leasing or renting of goods category, he/she cannot claim any deductions under Section 44AD.
All Indian residents, (Individuals, Hindu Undivided Families (HUFs) and partnership firms are eligible to claim deductions.
Certain assesses are not eligible to claim deductions as per their profession as mentioned in Section 44AA.
Application of Section 44AD with regards to Allowances and Disallowances
A taxpayer cannot claim any deductions under Section 30 to Section 38 if he/she chooses to file their returns under Section 44AD.
In the case of a partnership firm, any additional deductions can be claimed under Section 40(b) provided that any remuneration or interest is paid to the partners of the firm. This claim has a particular limit as mentioned under Section 40(b).
Application of Section 44AD with regards to Advance Tax
As per Section 44AD, the assessee need not pay any kind of tax in advance with regards to the income earned through the business. However, if the income earned is in the form of commission valuing more than the taxable limit of Rs. 10,000, then the assessee needs to pay Advance Tax.
Application of Section 44AD with regards to written down of the depreciable value
Businesses that fall under those mentioned in Section 44AD, can write down their permitted asset value and claim them as mentioned under Section 32.
Application of Section 44AD with regards to professionals
The taxable income for professionals claiming deductions needs to be at 50% of the total receipts for the said financial year.
List of professions under Section 44AD:
- Lawyers
- Doctors
- Technical Consultants
- Architects
- Interior Decorators
- Engineers
- Chartered Accountants
Features of Section 44AD of the Income Tax Act
The following conditions must be fulfilled for assesses opting for presumptive taxation.
- Turnover must be up to Rs. 2 crores to apply for this facility.
- Minimum net income must be 8% of turnover (it must be 6% for digital receipts)
- No need to keep accounting records
- Assesses must pay 100% advance tax by March 15 of that specific financial year.
- Tax return filing in ITR-4 offers a simpler and shorter form than ITR-3.
- There is no need to audit accounting records.
The presumptive scheme includes professionals as well, but the 5 years condition applies to business only.
Eligibility Criteria to Avail the Benefits of Presumptive Taxation Scheme under Section 44AD
All Indian residents, (Individuals, Hindu Undivided Families (HUFs) and partnership firms can avail the provisions under this act.
Any businesses whose annual turnover does not exceed Rs. 2 crores.
Applicable Rate and Income Computation under Section 44AD
The annual turnover must be less than Rs 2 crores.
The net income should be 8% of your turnover (the minimum net income should be considered 6% in the case of digital receipts).
Analysis of the Conditions
If a taxpayer declares the gains below 8% (or 6% for digital receipts), he/she cannot opt for the scheme. However, if they cannot opt for the presumptive benefits for any other reasons, the restrictions under Section 44AD of the income tax act do not apply.
The following illustration explains the condition:
In FY 2018-2019, Mr. Rohit’s turnover was Rs. 1.6 crore. He has an income of Rs. 13 lakhs and chooses presumptive taxation. His turnover for FY 2019-2020 is Rs. 2.2 crore and for FY 2020-2021 is Rs. 1.8 crore. Is it possible to avail of the scheme in FY 2020-21?
When gross turnover exceeds Rs. 2 crores, Mr. Rohit will not be eligible for the presumptive benefits. In this situation, he can declare his income according to normal provisions (not Section 44AD) in FY 2019-2020. However, he can opt for this scheme in FY 2020-2021. He should declare gains of above 8% or 6% (digital receipts) for the financial year 2019-2020 in normal income computation.
Also Read: How to use an online income tax calculator?
Maintaining Books of Accounts
If a taxpayer has not obeyed Section 44AD(4) and the total income is above the restricted limit, he/she would have to keep a book of accounts.
Let’s illustrate the fact with the following example:
Rupa has a sole proprietorship business, and her gross turnover during FY 2019-2020 is Rs. 1.7 crore. She chooses presumptive income for the first time in FY 2019-2020 by making profits over 8%.
During FY 2020-2021, her turnover is Rs. 1.8 crore, but she declares gains below 8% and files income according to regular provisions (claiming all expenses). After computation, her taxable income is Rs. 8.2 lakhs (exceeds the basic exemption slab). Is she liable to keep tax audits and books of accounts?
Since Rupa has an income below the minimum limit of the presumptive scheme in FY 2020-2021, she will have to report her income as per normal computation. She cannot opt for the scheme for 5 years.
If her taxable income exceeds the exemption slab in these 5 years, she is liable to keep accounting records and maintain a tax audit for the specific financial year. Hence, during FY 2020-2021, her taxable income is above the exemption cap, and she did not qualify for Section 44AD of the Income Tax Act.
Tax Audit
A tax audit is needed in these two types of situations (for business income except 44BBB, 44BB and 44AE):
- When Section 44AD(4) is applicable and the total income is above the exemption limit
- In regular cases (computation of normal business income), when the taxpayer’s total turnover exceeds Rs. 1 crore, regardless of profit percentage
For individuals, the basic exemption limit is Rs. 2.5 lakhs, while for companies and firms, it is nil.
Final Word
As per Section 44AD of the Income Tax Act, taxpayers with below Rs. 2 crore turnovers need not maintain accounting data. Their profits would be presumed to be 8% of their turnover for taxation purposes. To avail of the benefits of this scheme, the income credited through the bank or digitally must be 6%, while it must be 8% for cash payments.
FAQs on Section 44AD of Income Tax
Ans: The Finance Act, 1994 introduced Section 44AD, which came into effect from the assessment year 1994-1995. There have been new updates in the Section since the introduction. Budget 2021 has also updated who can avail of this taxation facility.
Ans: Under Section 44AD, taxpayers with up to Rs. 2 crore turnovers need not maintain accounting records. In Budget 2020, it has been amended to Rs. 5 crores subject to the digital transaction’s minimum criteria.
As per the presumptive income scheme, a taxpayer can presume the profits at a specified rate of the overall turnover and is relieved from auditing books of accounts.
Ans: The following assessees can opt for presumptive taxation:
Partnership firms, HUFs and resident individuals who did not claim for exemptions under section 10BA/10B/10AA/10A (deductions derived from the export of things or articles)
The individual’s or firm’s gross receipts in the preceding year must not be above Rs. 2 crores. In Budget 2020, the amount is Rs. 5 crores, depending upon the minimum eligibility of digital transactions of above 95% of total payments and receipts.
Firms or individuals involved in the business of hiring goods carriages/plying cannot adopt this provision.
Ans: An assessee can use the simplified income tax return form, known as Sugam ITR-4S, to file the tax return under this Section. He must be eligible to declare the gains under presumptive taxation. Individuals can file ITR 4 using the income tax e-filing website.
Ans: As per Section 44AD, individuals will calculate income by keeping 8% of the turnover (or 6% for digital payments and receipts). For example, Riya has a bookstore with Rs. 72 lakhs turnover for the preceding year.
Since she wants to opt for presumptive taxation, her income will be calculated at 8% of Rs. 72 lakhs (8÷100×72,00,000 = Rs. 5,76,000). Yearly presumptive tax will depend on the slab of Rs. 5,76,000.
Disclaimer
This article is solely for educational purposes. Navi doesn't take any responsibility for the information or claims made in the blog.
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