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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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.
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.
I am a practicing doctor, majority of my receipts are in cash but my gross receipts are less than Rs. 50 lakhs. Can I opt this presumptive taxation scheme?
The condition of cash receipts not exceeding 5% of the gross receipts is applicable only on the enhanced limits of ₹75 Lakhs, so you can opt for presumptive taxation scheme even if your cash receipts exceeds 5% of the gross receipts with total receipts not exceeding ₹50 lakhs.
Hope this helps!!
Hello Niyati, I am working as freelancer for a foreign client. My income would be 60L approximately. Since the income exceeds the limit of 50L but less than 75L can I still opt for sec 44ADA? I have no other source of income.
Yes, you can opt for Sec 44ADA as your income is less than ₹75 Lakhs. The enhanced limits are applicable for the FY 2023-24. Also you will have to check that your cash receipts don’t exceed 5% of the gross income from Freelancing.
Hope this helps!!
Thanks for your reply. I don’t earn any money in form of cash.
Since you won’t be earning any money in form of cash you can opt for Sec 44ADA
Hi @CA_Niyati_Mistry. Thank you so much for your time.
I successfully filed my taxes under 44ADA for AY 22-23. I want to file my tax for AY23-24 now. I have two major questions.
Cleartax has this to say.
They say I have to file it by 31st July 2024. What am I missing? Again thank you for your time!
@CA_Niyati_Mistry I have a thread about this topic here now.
On further research I realised I misunderstood quite a few things.
Please correct me if I’m wrong!
Income tax filing and Advance payment are completely different things. You pay advance tax before 15th March of the financial year and then file your income tax returns in the Assessment year.
Okay it makes sense now. I will make the following assumptions for my timeline. Please let me know if I am correct.
For my FY22-23 income, I should go to the income tax website and pay my estimated advanced tax for the income I earned between 1st April 2022 and 31st March 2023 under AY23-24. Because I’m eligible for 44ADA, I have the benefit of paying it all in one go before March 15th 2023 instead of paying it in instalments.
Then before 31st July 2023, I will have to file my income tax return. Neutral case - I won’t have to pay anything when filing my ITR because my estimated advanced tax payment was correct. Worst case - I have to file any difference and pay some more. Best case, my advance tax payment was more and I get a refund.
Are the dates mentioned correct? Are my assumptions right? Thanks again for your time.
Yes, the dates mentioned and the assumptions are correct. Income Tax Return filing and Advance Tax payment are two different concepts. While you file ITR after the PY 2022-23 ends till 31st July, Advance tax is the tax liability that you pay before the year ends. In case of 44ADA only one installment of Advance tax is applicable i.e 15th March where you pay the entire estimated tax liability in one go.
At the time of return filing the income will be calculated again and thus tax liability might differ from what you had determined earlier at the time of Advance tax payment. In case you have paid excess Advance Tax you will receive refund and in case of deficiency you will have to pay tax along with interest.
Hope this clarifies!
so . whether i opt for presumptive or non-presumptive ; advance tax has to be paid as pet the % slabs and as per the dates ! am i right ?
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