Presumptive Taxation under section 44AD in India

To ease the compliance procedures to small tax payers , Indian Government provides for a scheme of Presumptive Taxation. Under this scheme, assessee is not required to maintain the books of accounts and their Profits are presumed to be a certain percentage of total sales.

Eligibility Criteria

Below are the types of tax assesses who can adopt the provisions of presumptive taxation scheme Under Section 44AD :

• Resident Individual tax payers
• Hindu Undivided Families
• Partnership Firm (except LLP or Limited Liability Partnership Firm)

The firm or individual’s gross receipt or annual turnover in the previous year should not have exceeded Rs. 2 crores.
While this list includes those who can avail the benefits of Section 44AD of Income Tax, those belonging to the categories below are not eligible to opt for this scheme

• Any individual engaged in running an agency business.
• Persons who have claimed tax exemptions under Sections 10AA, 10A, 10BA or 10B along with Sections 80RRB or 80HH during a given assessment year.
• Persons whose income is generated from brokerage fees or commissions.
• Businesses included under Section 44AE, engaged in tasks like leasing, plying, and hiring of goods carriages.

Applicable rate

• Eligible assessees who are willing to adopt the presumptive taxation scheme under the provisions of Section 44AD has to compute their income on the estimation basis. It is calculated at the rate of 8% of Gross receipts or total annual turnover of the business for the previous year. Assessee can even declare an income in his income tax return higher than the presumptive income shown as per the scheme.

Important Points to Remember for Section 44AD

• For assessees with multiple businesses, the total turnover from all such businesses is taken into account for calculating the estimated income.
• Those declaring their income under this Section are eligible to avail tax benefits under Chapter VI-A of the Income Tax Act, 1961.
• Those applying for benefits under this Section will need to file their income tax returns through ITR Form 4.
• Assessee can pay the Advance tax of the previous year in the last quarter (ie.100% advance tax by 15^thMarch of that particular Financial year)

Notable Amendments

a) Amendments introduced through the Finance Act 2016

These amendments came into force from the financial year 2016-2017 –

• One cannot claim remunerations, interests and salary paid to his/her partners as deductions.
• Businesses opting to receive benefits under Section 44AD will need to follow provisions put forth under Advance Tax. However, in such cases, the business will need to pay 100% of their Advance Tax within March 15th of the financial year. All other compliances under Advance Tax are retracted. Any amount paid by way of advance tax on or before 31st day of March shall also be treated as advance tax paid during the financial year ending on that day.

b) Amendments introduced through the Finance Act 2017

The amendments put forth under this Act were –

• Businesses that receive payments digitally could claim 6% of the total payments received in such a manner as their estimated income in the following year.

This amendment was made to encourage businesses to opt for digital payments after the government introduced demonetisation in 2016.

Opt out of Presumptive Taxation scheme :

In this regard, one should remember that any business that opts out of Section 44AD cannot choose to avail the benefits of this scheme in the next 5 years
Section 44ADA was included in the Income Tax Act as a component of the presumptive tax scheme.

Objectives of Section 44ADA

• Simplification of the tax system for self-employed professionals.
• Reduction of the tax burden on self-employed individuals.
• Facilitating a smooth way of conducting business.
• Establishment of parity among businesses under Section 44ADA of the Income Tax Act.

Professions eligible for 44ADA Presumptive scheme :

Individuals who practise these specific professions are deemed eligible under this Section 44ADA.

• Accountants
• Medical services
• Legal services
• Technical consultants
• Engineers
• Architecture
• Interior Decorators
• Film artists
• Company secretaries
• Other professions mentioned by the Central Board of Direct Taxes
• Notably, this taxation regime of presumptive income under section 44ADA applies to residents who are – HUF, individuals, Limited Liability Partnership Firms, Partnerships other than LLP.

Turnover Criteria :

Section 44ADA will be applicable only when the total gross proceeds in the financial year is less than Rs.50Lakhs

Rate of Presumptive Tax under Section 44ADA

The income covered under Section 44ADA is 50% of the gross earnings from a profession for the given fiscal year. It must be noted that such a figure has been ascertained on the assumption that professionals incur a relatively low expenditure when compared to Minimum alternate tax 

Exemptions Under Section 44ADA

Individuals who follow this section will be allowed these following –

• An eligible individual will be entitled to all deductions under Section 30-38, which includes unabsorbed depreciation or allowances.
• The written down value or WDV of depreciable assets will be calculated again post deduction of allowed depreciation.

Benefits of this section :

• Assessee need not maintain books required to be kept u/s 44AA
• Assessee need not get the accounts audited u/s 44AB
• Those applying for benefits under this Section will need to file their income tax returns through ITR Form 4.
• Assessee can pay the Advance tax of the previous year in the last quarter (ie.100% advance tax by 15^th March of that particular Financial year)

Maintanance of books : conditions 

If both the following conditions are satisfied, maintenance of accounts and audit are warranted:

• Income from profession is offered at a rate lower than 50% of gross receipts AND
• Total income of the assessee exceeds the basic exemption limit

Opt out option :

• A person can opt in and opt out of Section 44ADA at any time without any restriction unlike section 44AD.
• Under Section 44ADA, the assesse can anytime opt in for this scheme and at any assessment year opt out for normal taxation provisions as per Income Tax Act ,1961.