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Presumptive Taxation – Section 44AD of Income Tax Act

Section 44AD is about the presumptive taxation scheme that was introduced in the Income Tax Act to reduce the tax load on the assessees whose turnover is less than INR 2 crores. If an assessee opts for paying tax on a presumptive basis, he/she claims that they do not maintain proper books of accounts and thus, there is no obligation to get the accounts audited.

In this article, we will point out:

Assessees Eligible for Presumptive Taxation Scheme under Section 44AD

The presumptive taxation scheme can be opted by:

  • Resident Individuals
  • Hindu Undivided Families (HUFs)
  • Partnership Firms (except Limited Liability Partnership Firm-LLP)

Note: To be eligible for this scheme, the assessee should not have claimed any deductions under sections 10A, 10AA, 10B, 10BA or under any provisions of Chapter VIA of the income tax act.

Presumptive Taxation Scheme Under Section 44AD – Important Pointers

As per section 44AD:

  • Any eligible assessee who is earning income, from a business whose total turnover from such business does not exceed INR 2 crore and who declares his profit at the rate of 8% of total turnover, is not required to get his books of accounts audited.
  • However, if such eligible assessee receives his/her total turnover or gross receipts digitally (non-cash), by an account payee cheque/account payee bank draft/Electronic Clearing System (ECS), then, instead of 8%, 6% of the total turnover can be declared as profit.
  • If an eligible assessee claims the benefit of section 44AD then, it is to be assumed that the Written Down Value (WDV) of any asset in the stated business has been calculated after providing for the available deduction for depreciation. This also means that no separate deduction for depreciation is allowed from the declared profits.
  • An assessee is not eligible to claim the benefits of the provisions of this section for five assessment years if, he/she chooses to declare profits on any other basis for any assessment year. That means, if an assessee declares profits as per any section other than section 44AD in AY 2020-21, he/she cannot claim the benefits of section 44AD for the next five consecutive AY years – (explained below).
  • To avail the benefits of this section, assessees cannot claim deductions under sections 30 to 38 of the Income Tax Act. It will be assumed that these deductions are already availed.
  • If the assessee is a partnership firm, salary and interest paid to partners can be deducted from the profits declared, subject to conditions.
  • Assessees who opt for this scheme need not pay advance tax instalments quarterly. In case the estimated tax is more than INR 10,000, 100% of the supposed tax can be paid at once, as Advance Tax, by the 31 of March of the relevant financial year.

Non Applicability of Section 44AD

The provisions of section 44AD shall not apply to—

  • Every person carrying on legal, medical, engineering, architectural, accounting, technical consultancy, interior decoration profession or any other profession as notified by the relevant board;
  • Any person carrying on the business of plying, hiring or leasing goods carriages referred to in Section 44AE;
  • A person earning income through commission or brokerage; or
  • A person carrying on any agency business.

Opting out of Section 44AD

As mentioned above, an eligible assessee cannot avail the benefits u/s 44AD for the next five years if he/she opts out of the presumptive taxation scheme u/s 44AD. That means, once the assessee opts out of this scheme, he/she needs to maintain books of accounts regularly and get them audited u/s 44AB by a Chartered Accountant (CA).

Let us understand this with an example:

Particulars Presumptive Taxation u/s 44AD for Business
AY 2017-18, 2018-19, AY 2019-20 Opts for Presumptive Taxation u/s 44AD
AY 2020-21 Does not opt for Presumptive Taxation scheme u/s 44AD
AY 2021-22 to AY 2025-26 Can not opt for Presumptive Taxation u/s 44AD

Note:

  • In case an assessee is carrying out both business and profession, he/she is eligible to opt-in for this scheme on the income earned from business and NOT from that of the profession. For the professional income earned, the assessee can declare profits u/s 44ADA.
  • The eligible assessee can file his tax return in ITR-4.