Presumptive-Taxation-Scheme-U-S-44AD

Presumptive Taxation Scheme U/S-44AD

Posted by CA Pankaj Kumar Vats
In: Taxation
On 19 Apr 2024

Contents Covered

  • What is Section 44AD of the Income Tax Act
  • Who is eligible person for section 44AD?
  • Eligible Businesses for section 44AD
  • What is the threshold turnover limit such business.
  • “In section 44AD, how is the profit declared for business”.
  • What if profit lower than 8% or 6% in section 44AD.
  • What if ITR filed in 44AD and not filed in subsequent year.
  • Why should one opt for 44AD /and Benefits.
  • Conclusion

1. What is Section 44AD of the Income Tax Act:

44AD of the Income Tax Act offers a presumptive taxation scheme for eligible small businesses and professionals. This scheme allows them to compute their income tax liability based on a presumed percentage of their turnover as profit instead of maintaining detailed books of accounts.

Instead of getting stuck with maintaining detailed accounts, you can simply report your income based on a fixed percentage of your turnover. Consider it a simplified tax return – just plug in your turnover; your income is presumed.

Presumptive Income Meaning

  1. For Cash Receipts 8% or Higher.
  2. For digital (non-cash) Receipts the rate would be 6% or Higher.

    For example, if your business had total revenue of Rs. 1 crore in the previous year, and your cash receipts total up to Rs. 30 lakhs, your taxable income under presumptive tax rules will be Rs. 6.6 lakhs (2.4 + 4.2 lakhs).

    Total sale in cash                             =                30 lakh

    Total sale in (non-cash)                  =                70 lakh

    Total income                                     =                3000000 * 8% = 240000

                                                                =                7000000 * 6% = 420000

    Total income                                     =                240000 + 420000

                                                                =                 660000

2. Who is eligible person for section 44AD?

Eligible Businesses: This scheme is applicable to individuals, Hindu Undivided Families (HUFs), and partnership firms (other than LLPs).

3. Eligible Businesses for section 44AD:

Those Business Whose Turnover does not exceed 2 crore during the year are eligible for section 44ad. but there are few businesses which are not eligible to comes under section 44ad mentioned below:

  1. Assessee should not engaged in profession (sec 44aa(1) ) like CA, Doctor, Lawyer, Architech, Filmstars
  2. Earning income from commission or brokerage like property brokerage or share brokerage
  3. Agency businesses
  4. Business of plying, hiring or leasing goods carriage (sec 44ae).

4. What is the threshold turnover limit such business:

Presumptive taxation for businesses is covered under section 44AD of the ITR. Any business which has a turnover of less than Rs 2 crore can opt to be taxed presumptively. They must declare profits of 8% OR higher for non-digital transactions or 6% for digital transactions, whichever one is applicable.

5. “In section 44AD, how is the profit declared for business.”:

Section 44AD of the Income Tax Act in India provides for a presumptive taxation scheme for certain eligible businesses. According to this section, eligible taxpayers can declare their income at a prescribed rate without maintaining detailed books of accounts.

As per the provisions of Section 44AD, the eligible business is required to declare profits at a minimum rate of 8% of total turnover or gross receipts for the financial year. However, if the declared profit is more than 8%, the taxpayer is not required to maintain books of accounts and is deemed to have complied with the requirements of the Income Tax Act.

6. What is profit lower than 8% or 6% in section 44AD:

If assessee declared profit lower than 8% or 6%  then assessee has to prepare proper books of accounts.

7. What if ITR filed in 44AD and not filed in subsequent year:

Loss of presumptive taxation benefits: By not filing the ITR under Section 44AD in subsequent years, the taxpayer may lose the benefit of presumptive taxation scheme and may be required to maintain regular books of accounts and undergo a detailed assessment process.

FY(21-22)FY(22-23)FY(23-24)FY(24-25)
Business 44 AD optedNot opted 44ADNot eligibleNot eligible
SalaryBusiness Not opted 44ADEligibleEligible
Business Not opted 44ADBusiness Not opted 44 ADEligibleEligible
Others Opted 44ADOpted 44ADNot optedNot Eligible for Next 5 year’s.

 

8. Why should one opt for 44AD /and Benefits?

Simplicity: The scheme simplifies the taxation process by allowing taxpayers to declare their income at a prescribed rate without the need for maintaining detailed books of accounts. This reduces the compliance burden, especially for small businesses with limited resources or expertise in accounting.

Reduced Compliance Cost: By opting for presumptive taxation, businesses can save on the costs associated with maintaining regular books of accounts, hiring accounting professionals, and undergoing audits.

Certainty: Under Section 44AD, the minimum prescribed rate of profit ensures certainty in tax calculation, providing businesses with a predictable tax liability based on their turnover or gross receipts.

Time-saving: Since detailed accounting records are not required, taxpayers can save time on record-keeping and focus more on their core business activities.

Tax Planning: For businesses with relatively lower profits compared to their turnover, opting for presumptive taxation may result in lower tax liability compared to regular taxation methods.

9. Conclusion:

Income Tax Return is very important to contribute to nation-building. Additionally, it helps to claim TDS refunds, makes your loan applications easier to process, and helps you to carry forward any losses. You also need to file an ITR to claim deductions and exemptions under the ITR.

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