Section 44AD of Income Tax Act (Presumptive Taxation Scheme)

As per the provisions of Income Tax Act 1961, persons carrying on business or profession have to maintain its books of accounts compulsory under section 44AA and get its accounts audited under section 44AB.

In Presumptive Taxation Scheme under section 44AD of Income Tax Act, there is some relief for small taxpayers in order to maintain books of accounts and get them audited.

Section 44AD of Income Tax act gives relaxation to those who carry on business and have turnover / gross receipts upto Rs.2 crore.

     

    What is section 44AD of Income Tax Act?

    Section 44AD of Income Tax act (Presumptive Taxation Scheme) provides relaxation from maintaining books of account and getting them audited for those businesses whose turnover/gross receipt does not exceed Rs. 2 crore. Person adopting presumptive income under section 44AD has to declare at a prescribed rate.

     

    Applicability of Section 44AD of Income Tax Act

    Presumptive Taxation Scheme under section 44AD applies to:

    • Resident Individual
    • Resident Hindu Undivided Family (HUF)
    • Resident Partnership Firm

    And this section is applied to those who have not claimed deduction under section 10A/10AA/10B/10BA and 80HH to 80RRB in the relevant year.


    Non- Applicability of Section 44AD of Income Tax Act

    Presumption taxation under section 44AD shall not apply to:

    • Any agency business
    • A specified profession
    • Business whose turnover/gross receipts exceeds Rs. 2 crore
    • Business of plying, hiring, leasing of goods carriage (covered under section 44AE)
    • Limited Liability Partnership
    • Company
    • Non-Resident

     

    Computation of Presumptive Taxation Scheme

    Section 44AD computes the presumptive income for those businesses whose turnover/gross receipt is upto Rs. 2crore. These businesses need not to maintain books of accounts and get them audited if they adopt section 44AD. Under section 44AD a prescribed rate is considered as income.

     

    Prescribed Rate of Presumptive Income

    8% of total turnover/gross receipt shall be considered income under the head of profits and gains from business or profession.

    The same rate is to be considered at 6% if turnover/gross receipt is received by an:

    • Account payee cheque
    • Account payee draft
    • Electronic clearing system

    Person can voluntarily disclose more than 8% or 6% business income as the case may be.

    But it is important to note that there is a flat rate of 8% or 6%. No deductions will be allowed in computing income. No expenditure is allowed to deduct.

    Only you have to disclose income of business at a flat rate which seems to be easier for small businesses instead of maintaining books of accounts and incur huge costs to get them audited.

    In this Presumptive Taxation Scheme one has to pay the advance tax (if payable) on or before 15th March of the previous year.

     

    Deductions not allowed under section 44AD

    For disclosing presumptive income under section 44AD you have to forgo all the deduction from business income. No depreciation shall be allowed to deduct.

    In this section it is presumed that income is calculated after claiming expenditure as deduction. That’s why a flat rate is allowed i.e. 8% or 6% as the case may be.

    Carrying value/written down value of asset shall be computed assuming as it deprecation has been actually allowed.

     

    Opt out from Section 44AD (Presumptive Taxation Scheme)

    If you are disclosing income as per section 44AD in a financial year then you must declare income under section 44AD for 5 consecutive previous years.

    But if you fail to disclose income as per the requirement of section 44AD for 5 previous years then subsequent to last return filed, you cannot take benefit of the section 44AD for 5 years.

    Example:

    Mr. X disclosed presumptive income in the year FY 2019-20 and he must disclose profit according to section 44AD for the next 5 consecutive years.

    But suppose Mr. X follow section 44AD in FY 2020-21, FY 2021-22 but fails to disclose in FY 2023-24 as per the requirement of section 44AD than due to this act Mr. X cannot avail benefit of section 44AD for the next five years i.e. from FY 2024-25 to FY 2028-29.

    Now Mr X has to maintain books of account and get them audited if total income exceeds the maximum amount not chargeable to tax.

     

    Conclusion

    Section 44AD of Income Tax Act gives a sort of relaxation from the burden of maintaining books of accounts under (Presumptive Taxation Scheme). Now small businessmen who have not much of turnover or turnover is up to Rs. 2 crore, can avail the benefit in this section by disclosing presumptive income at prescribed rate of 8% / 6% as the case may be.

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