Section 44AD: Presumptive Taxation for Business

To provide relief to small taxpayers from the tedious task of maintaining books of accounts and getting books of accounts audited, the CBDT introduced the Presumptive Taxation Scheme. Section 44AD of the Income Tax Act provides the provision of the presumptive taxation scheme for businesses. A business with a turnover of up to INR 3 Crore can take the benefit of presumptive taxation under Section 44AD.

Section 44AD: Eligibility

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 an 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

The Budget 2023 revised presumptive taxation limits under Sec 44AD for Business upto INR 3 crore Previously the limit was upto INR 2 crore only..

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The Budget 2023 revised presumptive taxation limits under Sec 44AD for Business upto INR 3 crore Previously the limit was upto INR 2 crore only..

Calculation of Presumptive Income under Section 44AD

To opt for Presumptive Taxation Scheme under Section 44AD, the following two conditions should be satisfied:

1. The gross sales or turnover of the business should be less than or equal to INR 3 Crore.
2. 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 2023-24 are INR 1.8 Crore. Sales include cash payments of INR 80 lacs and non-cash payments of INR 1 Crore. Total Purchases are INR 50 lacs. The total expenses are INR 20 lacs which 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 3 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 at least 6% of gross receipts for digital transactions and at least 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 income, they 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 – Taxpayers opting for a 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, they should file Form ITR 3.

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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, They 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), they should maintain books of accounts and get the books of accounts audited under Section 44AB(e)

Check Tax Audit Applicability u/s 44AB

Check Income Tax Audit applicability u/s 44AB to file Tax Audit Report Form 3CB - 3CD with your Income Tax Return.

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Check Tax Audit Applicability u/s 44AB

Check Income Tax Audit applicability u/s 44AB to file Tax Audit Report Form 3CB - 3CD with your Income Tax Return.

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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, they should opt for it for the next 5 financial years continuously. However, if the taxpayer fails to do so, they 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.

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