To provide relief to small taxpayers from the tedious task of maintaining books of accounts and getting books of accounts audited, the CBDT had introduced the Presumptive Taxation Scheme. Section 44AD is the presumptive taxation scheme for business. A business with turnover up to INR 2 Crore can take the benefit of presumptive taxation under Section 44AD.
Who can opt for Presumptive Income under Section 44AD?
The following taxpayers engaged in any business can opt for the Presumptive Taxation Scheme under Section 44AD.
- Resident Individual
- Resident HUF
- A resident partnership firm (not LLP)
The following taxpayers cannot opt for the Presumptive Taxation Scheme under Section 44AD.
- Non-Resident Taxpayer
- LLP i.e. Limited Liability Partnership
- A taxpayer other than individual, HUF, partnership firm
- Taxpayer claiming deductions under Section 10A/ 10AA/ 10B/ 10BA or Section 80H to 80RRB
- Business of plying, hiring or leasing of goods carriages under Section 44AE
- A taxpayer with agency business
- Taxpayer earning brokerage or commission income. Eg: Insurance Agent
Calculation of Presumptive Income under Section 44AD
To opt for Presumptive Taxation Scheme under Section 44AD, the following two conditions should be satisfied:
- The gross sales or turnover of the business should be less than or equal to INR 2 Crore.
- The taxpayer should report 6%/8% or more of the gross sales or turnover as income in the ITR.
Note: The prescribed rate of 8% is for non-digital transactions in the business and the rate of 6% is for digital transactions in the business.
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Example
Akshay runs a trading business. The gross sales for FY 2019-20 are INR 1.8 Crore. Sales include cash payments of INR 80 lacs and non-cash payments of INR 1 Crore. Total Purchases are of INR 50 lacs. The total expenses are INR 20 lacs that includes a salary, rent, electricity, maintenance, travelling, etc. Can he opt for the Presumptive Taxation Scheme under Section 44AD?
Since the gross sales are less than INR 2 Crore, Akshay can opt for Presumptive Taxation Scheme under Section 44AD.
- Pay tax on INR 12,40,000 lacs as per the slab rate.
- Do not maintain books of accounts as per Sec 44AA.
- Do not go for Tax Audit since the income reported is atleast 6% of gross receipts for digital transactions and atleast 8% of gross receipts for non-digital transactions.
Income Tax on Presumptive Income under Section 44AD
- Income Head and Tax Rate – Income under the presumptive taxation scheme is a business income classified under the head PGBP. Such income is taxable at slab rates as per the Income Tax Act.
- Claiming Expenses – Since the taxpayer reports a fixed percentage of gross receipts as the income, he/she cannot claim expenses. However, they can claim deductions under Chapter VI-A. Partner’s remuneration and interest on capital can be claimed as an expense in case of a partnership firm opting for presumptive taxation.
- Payment of Advance Tax – Taxpayer opting for presumptive taxation scheme under Sec 44AD should pay the entire amount of advance tax on or before 15th March of the financial year. If the advance tax payment is not done before the due date, interest under Section 234C is levied. The interest would be levied only if the tax liability exceeds INR 10,000.
- ITR Form – Taxpayers opting for presumptive taxation under Section 44AD should report such income as PGBP Income and file Form ITR 4 on the Income Tax Website. They must mention the specified Business and Profession Codes based on the nature of the profession. If the taxpayer has income from capital gains along with presumptive income, he/she should file Form ITR 3.
Tax Audit and Books of Accounts for Presumptive Income under Section 44AD
- Books of Accounts under Sec 44AA – If a taxpayer opts for a presumptive taxation scheme u/s 44AD and reports income at 6%/8% or more of the gross receipts, he/she is not required to maintain books of accounts as per Sec 44AA.
- Applicability of Tax Audit – If a taxpayer declares income less than 6%/8% of gross receipts and the total income exceeds INR 2,50,000 (basic exemption limit), he/she should maintain books of accounts and get the books of accounts audited under Section 44AB(e)
Section 44AD of Income Tax – 5 Year Rule
As per this rule, if a taxpayer opts for the presumptive taxation scheme in a financial year, he/she should opt for it for the next 5 financial years continuously. However, if the taxpayer fails to do so, he/she would not be able to take the benefit of presumptive taxation scheme for the next 5 financial years. For eg: A professional opts for Sec 44AD for AY 2018-19 and AY 2019-20. However, for AY 2020-21, he does not opt for the presumptive taxation scheme. In this case, he will not be eligible to claim the benefit of the presumptive taxation scheme for the next five AYs, i.e. from AY 2021-22 to AY 2025-26.
FAQs
Yes. If the total tax liability for a financial year exceeds INR 10,000, you must pay advance tax. If you have opted for presumptive taxation scheme u/s 44AD or 44ADA, you are required to pay advance tax on or before 15th March instead of 4 installments in other cases. However, if you fail to pay advance tax by 15th March of the financial year, interest is Sec 234B and Sec 234C is required to be paid.
A person engaged in a business having gross sales or turnover up to INR 2 Cr has the option to opt for the Presumptive Taxation Scheme under Sec 44AD. He/she can report 6%/8% or more of gross receipts as income and pay tax on it. If they opt for Presumptive Taxation, they are not required to maintain books of accounts as per Section 44AA. They are also not liable for Tax Audit as per Section 44AB.
Could you please clarify if a person opts for 44AD for one financial year and in the year 2 and year 3 there is no business income.
1. Is it mandatory to file return u/s 44AD for year 2 and year 3 when business income is zero
2. In case that person has business income in year 4, Can he still opt for 44AD or he will not be able to take benefits of 44AD for year 4 and another next 4 years (Total 5 years) as there was no business income in year 2 and 3 and he is considered as deemed opt out year 2 and year 3.
Hey Chetan,
1. It is not mandatory to file ITR u/s 44AD if you have no business income in the financial year.
2. In year 4, taxpayer can still opt for Section 44AD but if he opts out of it, he cannot claim the benefit for next 5 years.
Is there any limit for Claim for rate 6%. Like turnover will be up to this Percentage or any transaction in Ditigital will be liable for 6%. Please Clarify it.
Hey Satbir,
A business can opt for Presumptive Taxation Scheme under Section 44AD if your turnover is less than or equal to INR 2 Cr. For digital transactions, tax rate is 6% and for non-digital transactions, the tax rate is 8%.
A profession can opt for Presumptive Taxation Scheme under Section 44ADA if the gross receipts are less than or equal to INR 50 lacs. The tax rate is 50%.
Read more about Section 44ADA – Presumptive Taxation for Profession
Can 44AD be applied for speculative business(Intraday gains)?
Hey Sunil,
Yes. Section 44AD can be opted for any business income including speculative income (equity intraday trading).
I have loss of rs rs 150000 in equity delivery and intra day..turnover 45 lakhs…can i show 6% of profit under the scheam 44AD…
i dont want to carry forward loss…i simply want to show all my trades under this scheam without audit…not event i want to show any CG…
Hi Pradeep,
You can opt for Presumptive Taxation under Section 44AD for equity intraday trading. You should report 6% or more of turnover as presumptive income and pay tax on it at slab rates. You will not be able to carry forward the intraday loss. Income from equity delivery trading should be reported as capital gains/ losses and you can carry forward the loss.
I had opted for 44AD in FY18-19 for reporting F&O trading profits and reported profits of 6%. For FY19-20 I have incurred loss in F&O trading. My total income for FY19-20 is less than the taxable limit. In this scenario –
– Is tax audit required for 44AD?
– How can I report 44AD loss while filing income tax returns? The income tax return utility for ITR3 does now allow to enter loss (-ve number) in the income under 44AD section.
Hey Amit,
Following are the answers to your queries:
1. Determine your tax audit applicability from this Quicko tool
2. Losses cannot be claimed under Section 44AD. Since you cannot use Section 44AD to declare your losses, you will have to declare your losses under business income, non-speculative losses. In this case, you will not be able to take the benefit of the presumptive taxation scheme for the next 5 financial years. For eg: A professional opts for Sec 44AD for AY 2018-19 and AY 2019-20. However, for AY 2020-21, he does not opt for the presumptive taxation scheme. In this case, he will not be eligible to claim the benefit of the presumptive taxation scheme for the next five AYs, i.e. from AY 2021-22 to AY 2025-26. Read more about Section 44AD in this article. Hope this helps 🙂
I had opted for 44AD during AY19-20. For current AY20-21, I have incurred losses hence I cannot opt for 44AD. Will this create problem for me to opt for 44AD next year considering the 5 year rule for section 44AD?
Hi Amit,
You can still opt for Presumptive taxation u/s 44AD after incurring losses. You can report 6% or more as a profit of the gross sales or turnover in the ITR and avoid breaking the 5-year rule. However, if you break the 5-year rule you will be unable to opt for the presumptive scheme next year. Hope this helps 🙂