Presumptive Income under section 44AD: The Income Tax Act of 1961 mandates individuals engaged in business and professions to maintain books of accounts and undergo account audits. However, to ease the compliance burden on small taxpayers, the Act has introduced the presumptive taxation scheme under sections 44AD, 44ADA, and 44AE. This scheme allows taxpayers to declare their income at a fixed rate, eliminating the need for detailed bookkeeping and account audits. In this article, we’ll delve into the provisions of section 44AD and explore its implications.
Eligibility for Presumptive Taxation Scheme (Section 44AD)
Section 44AD is available for resident individuals, Hindu Undivided Families (HUFs), and partnership firms (excluding Limited Liability Partnerships) engaged in any business, without specific business-type restrictions. However, taxpayers who have claimed deductions under sections 10A, 10AA, 10B, 10BA, or 80HH to 80RRB in the fiscal year cannot use this scheme.
Ineligibility for Presumptive Taxation Scheme (Section 44AD)
Businesses related to plying, hiring, or leasing goods carriages under section 44AE.- Agency businesses.
- Commission or brokerage businesses.
- Professions as defined in section 44AA(1).
- Taxpayers with gross receipts/total turnover exceeding Rs. 2 Crores (or Rs. 3 Crores if cash receipts during the year do not exceed 5% of total turnover/receipts).
Calculation of Presumptive Income under Section 44AD
Under this scheme, taxable income is computed presumptively at a rate of 8% of the turnover or gross receipts of the eligible business for the year. However, if the turnover/gross receipts are received via account payee cheque/account payee bank draft or electronic clearing system through a bank account or any other prescribed electronic mode before the due date for filing returns under section 139(1), the rate is reduced to 6%. Taxpayers can voluntarily declare their business income at a higher rate than 8% or 6% if desired.
It’s important to note that if a taxpayer chooses to file returns under Section 44AD, they forfeit the ability to claim deductions under Section 30 to Section 38 of the Income Tax Act, including depreciation. For partnership firms under Section 44AD, additional deductions can be claimed under Section 40(b) for remuneration or interest paid to partners, within prescribed limits.
Furthermore, disallowances as per sections 40, 40A, and 43B do not apply when using Section 44AD. The income calculated at the prescribed rate becomes the final taxable income, and no additional expenses are allowed or disallowed. While depreciation itself is not deductible, the Written Down Value (W.D.V) of any asset used in the business is calculated as if depreciation had been allowed.
Consequences of Opting Out of the Scheme
Once a taxpayer opts for the presumptive taxation scheme, they are obligated to continue using it for the next 5 years. Failure to do so will render the presumptive taxation scheme unavailable to them for the subsequent 5 years.
ITR Filing under the Presumptive Taxation Scheme
Taxpayers opting for a presumptive income scheme under section 44AD/44ADA/44AE should use ITR-4 (Sugam) for filing their returns. However, if their turnover exceeds Rs. 2 Crores, they must use ITR-3. Due date of filing return is same as the normal scheme.
Benefits of disclosing income under Presumptive Taxation Scheme
The Presumptive Taxation Scheme offers several benefits to taxpayers who choose to disclose their income under it.
(i) Simplified Accounting: Individuals and businesses under this scheme are not required to maintain detailed books of accounts, making their record-keeping significantly simpler. This reduces the administrative burden and time spent on accounting tasks.
(ii) Exemption from Income Tax Audit: Taxpayers opting for the Presumptive Taxation Scheme are exempt from the requirement of undergoing an Income Tax audit, which is mandatory for certain taxpayers under sections 44AA or 44AB of the Income Tax Act. This exemption further reduces compliance requirements and costs.
(iii) Advance Tax Payment: Taxpayers under this scheme are only required to pay the entire amount of advance tax on or before March 15th of the previous year. Unlike other taxpayers who must pay advance tax in multiple instalments on specific due dates (June 15th, September 15th, and December 15th), those under the scheme have a simplified payment schedule.
(iv) Simplified Income Tax Return (ITR): Taxpayers covered by the Presumptive Taxation Scheme can file their income tax returns using a simpler and shorter form, ITR-4 (Sugam). This form is designed to streamline the filing process and make it more straightforward.
(v) Reduced Compliance Burden: Overall, the Presumptive Taxation Scheme significantly reduces the compliance burden on taxpayers. It simplifies tax-related tasks, such as record-keeping, tax calculation, and return filing, making it easier for individuals and businesses to meet their tax obligations.
In summary, the Presumptive Taxation Scheme offers a range of advantages, including simplified accounting, exemption from income tax audit, a more straightforward advance tax payment schedule, the use of a simplified ITR form, and a reduced overall compliance burden. These benefits make it an attractive option for eligible taxpayers seeking to simplify their tax-related activities.
Conclusion
Section 44AD of the Income Tax Act 1961 provides a simplified taxation scheme for small taxpayers engaged in business, reducing the burden of maintaining detailed accounts and undergoing audits. While it offers convenience, taxpayers must carefully consider the implications and ensure compliance with the scheme’s requirements.
Follow the link of IT department for more details on this scheme– https://incometaxindia.gov.in/tutorials/13.%20tax%20on%20presumptive%20basis%20in%20case%20of%20certain%20eligible%20businesses.pdf
For more details on sec.44AD, you can also watch this video of Chartered Help (a group of CAs helping startups)–https://www.youtube.com/watch?v=V6dYHzVhcJ4
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