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:
Mentioned below are the types of taxpayers who can utilize the presumptive taxation scheme under section 44AD:
An individual has to satisfy the following conditions for unitizing the benefits provided by presumptive taxation under section 44AD:
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.
Let us take a few examples to understand the use of 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.
The small scale businessmen except the following businesses are allowed to get relief through Section 44AD:
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.
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.