The Income Tax Act, 1961 pertains to a number of schemes that benefit the tax payer. In the interest of the tax payers Presumptive Taxation Scheme section 44AD was designed for a smoother and simpler form of taxation of income in the hands of the assessee.
As per section 44AD, the small assessees who have annual turnover less than 2 crores in the previous year, can opt for a presumptive taxation regime i.e. the taxpayer can declare their income at a designated rate, therefore reducing their tax burden.
Moreover, for the persons opting for the presumptive taxation scheme, the auditing of books of accounts is exempted.
The presumptive taxation scheme is classified under section 44AD and section 44AE thereon in the Income Tax Act, 1961. In this article we will be discussing about the relevance of the section 44AD and its essence in the Act in detail.
Who are eligible for presumptive taxation scheme 44AD
The below stated are the entities who come under the definition of “PEOPLE” eligible under the provisions of the section 44AD.
- Persons who are residents of India.
- Hindu Undivided Family
- Partnership firms (Except Limited Liability Partnerships)
However, the above-mentioned need to satisfy the underlying condition of not exceeding their gross receipt or annual turnover over Rs. 2 crores.
To put it all in layman terms, if you are an individual with a small business and have gross annual turnover of around Rs. 75 lakhs ( which is less than 2 Cr) in the previous financial year, you can avoid the hassles of paperwork including filing your taxes by adopting the scheme included under section 44AD. Since, the provisions contained in this scheme are designed to suit the requirements of the small and medium size businesses.
But an important observation here is to keep in view the limitations of this section;
- The person or firm should not have claimed any deductions pertaining to sections 10A, 10AA, 10B, 10BA and also sections 80HH to 80RRB.
- Businesses of Plying and hiring goods carriages are also not eligible for availing the benefits of this scheme.
- Earnings in the form of commission or brokerage by an individual or firm by carrying out professional services are also excluded from benefitting from the presumptive taxation scheme.
What is the income tax rate under presumptive taxation scheme 44ADA ?
The taxes under the presumptive taxation scheme under section 44AD is taxed on estimation basis. That is, a rate of 8% taxes on the annual turnover of the assessee (who is eligible under the scheme and has declared to have his income taxed under this scheme) is chargeable in his hands.
Therefore, considering the above facts, if a person carrying out a small business having turnover of say, Rs. 1crore (< Rs. 2 crores), his annual presumptive tax will be Rs. 8 lakhs (8% of Rs. 1 crore).
Important points to be noted before applying under presumptive taxation scheme under section 44AD
The following terms should be kept in mind while calculating taxable income under the presumptive taxation scheme;
- If the assessee’s income generates from more than one business, then the gross turnover from all the businesses is to be considered for determining the eligibility criteria for the assessee (i.e. the income from all the businesses together should not exceed Rs. 2 crores in the previous financial year).
- While the above point varies, in case of an individual opting for the scheme under section 44AD, if he is carrying a business along with a professional practice. In this case, the business income can be taxed under the presumptive taxation scheme, but the income acquired from the profession is to be taxed at the prescribed provisional rates of the Income Tax Act, 1961.
And an important aspect of this scheme which is noteworthy is that an assessee claiming to be taxed under section 44AD, can also avail the benefits of deductions under Chapter VI-A (Section 80C to 80U) of the Income Tax Act, 1961.
What are the provision relating to book keeping under this scheme?
In case of assessee opting for the presumptive taxation scheme, there is absolutely no requirement for maintenance of books of accounts as well as auditing of books.
However, if the assessee’s actual business income is lower than the declared income under section 44AD; then his benefit of being exempt from maintaining of books of accounts is invalid, and such individual needs to prepare books of accounts related to his business and he is also obligated to have them audited as per the Section 44AB of the Income Tax Act, 1961.
Also, an important point to be noted here is that a person opting for taxation based on section 44AD, cannot avail deductions under the following sections;
Section 30-37 of Income Tax Act, 1961.
Section 40B: Interests and salaries paid to partners by partnership firms.
Section 43B: Provisions relating to statutory expenses to be claimed by the assessee.
For how many Year presumptive scheme will be applicable?
This additional condition has been added by substituting sub section (4) of 44AD which is –
If you are opting for the presumptive scheme, you must-
- File presumptive scheme for at least 5 years in continuation.
- If you decide to show and file profits as per regular business (ITR-3) before the end of these 5 years, you will lose presumptive benefits and disallowed from presumptive taxation for the subsequent 5 years.
Please note that 5 years shall be counted starting the year in which you first file usual taxes for such business.
That is to say that if a person who has opted to be taxed under the scheme elaborated in section 44AD, he/she needs to pay the taxes in the said scheme for a period of 5 years, and if he discontinues this scheme before 5 years he would lose the benefits of the scheme and will have to stay in the regular taxation regime.
Therefore, the above discussion brings us to the conclusion that the presumptive taxation scheme covered under the Section 44AD of the Income Tax Act, 1961, is the most beneficial for the small businesses, which have generally a heavy burden due to having to bear the cost of maintaining and auditing books of accounts.