Section 44AD of the Income Tax Act

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In order to reduce the burden of tax and to give relief from the tedious work of tax to small taxpayers, the Indian Government has incorporated a strategy of presumptive taxation. All the businesses adopting the presumptive taxation strategy are not needed to maintain a regular account’s book instead they are allowed to declare the income on a prescribed date.

This strategy is formed under two sections of the Income Tax Act, 1961 - Section 44AD and Section 44AE. People who adopt a presumptive scheme for taxation are not asked to get their accounts books audited. Let us understand section 44AD of the income tax in detail here:

Eligibility to Get the Advantages of Presumptive Taxation Strategy under Section 44D

Mentioned below are the types of taxpayers who can utilize the presumptive taxation scheme under section 44AD:

  • Hindu Undivided Families
  • Resident Individual Tax Payers
  • Partnership Firm (except the Limited Liability Partnership or LLP)

An individual has to satisfy the following conditions for unitizing the benefits provided by presumptive taxation under section 44AD:

  • An individual’s or firm’s annual or gross turnover in the last year should not be more than Rs.2 Crores.
  • Firms or individuals who are in the business of hiring and plying goods carriages are not eligible to adopt this business.
  • Any individual or firm who has not claimed the tax deduction under Section 10A, 10B, 10AA, and 10BA during the assessment year can take the benefits of Section 44AD. The same rule applies to the individuals and firms who have not claimed Income Tax deduction under Section 80RRB and 80HH.
  • Individual or firm who are involved in professional services wherein the income is earned in the form of commission or brokerage cannot avail the benefits of presumptive taxation strategy. However, this clause is amended and now the professionals are eligible to take the benefit of presumptive taxation scheme according to the new Section 44ADA effective from April 01st, 2017.

Note: An individual or business is allowed to opt for the presumptive scheme for at least five years in continuation. If one decides to file profits according to regular business before completion of five years, then he/she will lose the benefits provided by presumptive taxation and will be disallowed for the subsequent five years.   

Examples

Let us take a few examples to understand the use of Section 44AD:

  • Example 1: X is running a grocery store in which his annual turnover of last year was Rs.80Lakhs. He is eligible to adopt the presumptive taxation scheme under Section 44AD of the Income Tax. Adopting this scheme will relieve Mr. X very much as he will be relieved to do any kind of tedious paperwork related to taxation at financial year-end. In this way, Section 44D is basically for medium and small sized businesses.
  • Example 2: Let us take another example to understand this more precisely. Suppose firm ABC Pvt. Ltd is a manufacturing firm. Even though this firm is satisfying all the above-mentioned clauses of Section 44AD, but it cannot opt for the same because of the fact that the company is a private limited firm.

Computation of Income and Applicable Rates under Section 44AD

An eligible person who wants to adopt the scheme of presumptive taxation under Section 44AD should compute his/her income accordingly. This is calculated with the rate of 8% of the total yearly turnover or gross receipts of the firm or business for last (previous) year. An individual can also declare the income in his/her income tax return, which is higher than the presumptive income mentioned according to the scheme.

To understand this, let us take the example of Mr. X, who is running a grocery store and his annual turnover was Rs.80Lakhs for the previous year. If he adopts the presumptive tax scheme under Section 44AD of the Income Tax, then according to this scheme his income is computed at the rate of 8% of his annual turnover. Since Mr. X's annual turnover is Rs.80 Lakhs (less than Rs.2 Crores), his annual tax under presumptive taxation strategy will be Rs.6.4 Lakhs.

Section 44AD - Conditions

The small scale businessmen except the following businesses are allowed to get relief through Section 44AD:

  • The business of hiring, leasing, or plying of goods carriage
  • An individual who is earning through the business of brokerage or commission
  • A person who is having any agency business.

Presumptive Tax Feature of Section 44AD Strategy

According to the provisions of Section 44AD, the computed presumptive income of a business (6% to 8% of the annual income or business’s annual turnover for last year) is known as the actual net income of that business is covered in the presumptive scheme of taxation. Hence, an individual is not eligible for claim deduction under Section 38 or 30 of the Income Tax Act.

Digital Payments for Section 44AD

In order to promote digital payments and encourage small businesses to start using digital payments, a special provision is incorporated in Section 44AD of the Income Tax Act, 1961. This reduces the existing rate of considered total income of 8% to 6% with respect to the turnover received through an account payee cheque or through bank draft against account payee or by using the electronic clearing system by account (bank’s) during the previous year or before mentioning the final date provided in Section 139 (1) with regards to the past year. However, the current rate of deemed profit of 8% mentioned in Section 44AD of the Income Tax Act, will be applied to the total turnover received through any mode.

FAQs on Section 44AD under Presumptive Taxation

Question 1: Explain the Meaning of Presumptive Taxation Scheme?

Answer: According to Section 44AA of the Income Tax Act, if a person is involved in the business is needed to maintain regular account books in some circumstances. However, in order to give relief to small taxpayers from this tedious task of maintaining account books, the Income Tax Act has introduced the presumptive taxation scheme in Section 44AD, Section 44AE, and Section 44ADA. Anyone who is adopting this scheme of presumptive taxation is eligible to declare income at a defined rate and, in return, he/she gets relief from the tedious work of account books maintenance.

Question 2: Is an insurance Agent Eligible to Adopt this Scheme of Presumptive Taxation Under Section 44AD?

Answer: Any person whose source of income is brokerage or commission is not eligible to adopt the scheme of presumptive taxation under Section 44AD. In this way, the source of income of insurance agents is commission and hence he/she is not eligible to adopt a presumptive tax scheme under Section 44AD.

Question 3: My Annual Turnover for Last year has Exceeded Rs.2 Crore. Will I be Eligible to opt for Presumptive Tax Scheme Under Section 44AD?

Answer: A person is eligible to opt out for the presumptive taxation scheme if the annual turnover from his/her business is under Rs.2 Crore. Therefore, one cannot adopt the presumptive taxation scheme of Section 44AD, if his/her annual turnover is exceeding Rs.2 Crore.  

Question 4: Is an Individual Required to Maintain an Account’s Book According to Section 44AA, if He/She Opts Out for Presumptive Taxation Scheme Under Section 44AD?

Answer: Section 44AA of the Income Tax Act, 1961 provisions to maintain books of account by an individual who is involved in some profession or business. However, if a person is adopting the benefits of presumptive tax scheme under Section 44AD, then he/she is not allowed to maintain books of account under Section 44AA.

Question 5: According to Presumptive Tax Scheme Under Section 44AD, the Income of a Taxpayer is Computed at the Rate of 8% 6% of the Gross Receipt or Turnover and Through such Income will Taxpayer Allowed to Claim any Further Deductions?

Answer: According to the laws of Income Tax, the taxable income of a business is computed only after deductions made with respect of expenses that are deductible according to Income Tax Act and after disallowing all the expenses that are not deductible under Income Tax Act.

If a person is opting for presumptive tax scheme under Section 44AD, then the provision of disallowance/ allowance according to Income Tax Law will not be applied and the income that will be computed at the rate of 8% or 6% will be business’s final taxable income that will be covered in presumptive tax scheme and there will not be any provision of further expenses disallowance and allowance. While computing the income, according to section 44AD, separate deductions will not be provided. However, for any asset’s written down value used in this business will be calculated according to depreciation under section 32 is claimed and is actually allowed.

Question 6: Provide the List of Businesses that are not Eligible for Presumptive Taxation Scheme?

Answer: Section 44AD of the Income Tax Act is designed to provide relief to small taxpayers that are involved in any business except the following:

  • A person who is doing any agency business
  • A business of plying, leasing, hiring goods carriage referred to under Section 44AE.
  • Any business wherein total annual turnover is more than Rs.2 Crore.
  • A person who is income is generating through brokerage or commission.

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