Section 44AD of the Income Tax Act and Presumptive Taxation

Section 44AD of the Income Tax Act is a tax benefit offered to small taxpayers engaged in a business. It relieves them from the tedious task of maintaining accounts and getting them audited on time.

If you run a business, it is important to know about presumptive taxation under Section 44AD. It simplifies tax compliance for small businesses.

Here is everything you need to know about Section 44AD of the Income Tax Act.

What is Section 44AD of the Income Tax Act?

Section 44AD of the Income Tax Act is a taxation scheme that gives tax relief to small business owners based on presumptive income.

According to the Income Tax Act of 1961, any individual engaged in a business or profession is mandated to maintain a regular book of accounts and have them audited. This tedious work consumes a lot of time and effort.

They will have to determine the business's turnover and calculate the taxable income by deducting the applicable business expenses. This information will be derived from the books of accounts.

In order to provide relief from this herculean task, the presumptive taxation scheme was introduced. Under this presumptive taxation 44AD, you can declare your income at a prescribed rate of the turnover (total sales) and pay the corresponding tax. However, it applies only to businesses with a turnover within the specified threshold limits.

Section 44ADA refers to presumptive taxation applicable to income earned from a profession.

Recent Update - Annual Turnover Limit

*Applicable only when 95% of the receipts are through digital transactions (online mode of payment)

Objectives of Presumptive Taxation 44AD

Simplified Tax Compliance -

Section 44AD is introduced to simplify tax compliance for small businesses.

Expand Tax Base -

Extending a simplified process will help many small businesses comply with tax regulations.

Encourage Entrepreneurship -

It encourages individuals to start a business by allowing them to refrain from one of the most tedious tasks: maintaining the books of accounts.

How is Presumptive Income Under Section 44AD Calculated?

If you choose presumptive taxation 44AD, your business income is calculated on a presumptive basis at 8% of your annual turnover or gross receipts.

However, if you accept digital payments and the gross receipts or turnover is received by an account payee bank draft, account payee cheque or use of an electronic clearing system, the income is calculated at a reduced rate of 6%. The reduced rate was introduced to encourage small business owners to engage in digital transactions.

Therefore, for taxpayers choosing the presumptive scheme, the standard calculation of business income, which involves subtracting expenses from turnover, will not apply. Instead, business income will be computed at a rate of 6% or 8%, as applicable.

Note:

• You may voluntarily disclose business income that is more than 6% or 8% of the turnover, as applicable.

• If you declare income at a lower rate than that prescribed under Section 44AD, you must maintain a book of accounts and have them audited.

• The computed business income will be the final taxable income, and no further expenses will be allowed or disallowed.

• No separate deduction for depreciation is applicable. However, the written-down asset value in the business can be calculated as if depreciation under Section 32 was allowed.

Sample Illustration

Let us assume Ms Shakuntala runs a cloud kitchen business with a turnover of ₹1 crore for the previous year. She received ₹75 lakhs from digital transactions and ₹25 lakhs from non-digital transactions.

Therefore, the business income for the presumptive taxation can be calculated at 8% and 6% of the corresponding turnover. Her income under the head of business and profession is calculated as follows:

*Please Note: This is a sample illustration. Actual values can vary based on the individual circumstances.

The tax relief applies to the eligible taxpayers provided they meet specific conditions, which are discussed in the following sections.

Conditions that Apply to Tax Relief Under Section 44AD of the Income Tax Act

Total Turnover or Gross Receipts

If your business's annual total turnover or gross receipts exceed ₹2 crores, you cannot opt for the presumptive taxation 44AD.

However, if your business's cash receipts for the previous year did not exceed 5% of its turnover or gross receipts, the ₹2 crore threshold limit does not apply.

It also means if 95% of the receipts are made through the online payment mode, the ₹2 crore threshold limit does not apply.

In such cases, the threshold is increased to ₹3 crores. This is applicable with effect from AY 2024-25.

For this purpose, any cheque or bank draft that is not an account payee will be considered a cash receipt.

Consequences of Opting Out of Presumptive Taxation Scheme

If you have opted for the presumptive taxation under Sec 44AD of the Income Tax Act, you should continue to follow it for the next five consecutive years.

If you miss or fail to do so, you may not be able to opt for this presumptive taxation scheme for the next five years.

For example, consider that you have opted for the presumptive taxation 44AD for 2023-24. However, for AY 2024-25, if you did not opt for the presumption taxation scheme, you cannot opt for it for the next five years until AY 2029-30.

Furthermore, if your taxable income exceeds the minimum threshold for income tax liability, you will be required to maintain books of accounts and undergo the tax audit process.

Payment of Advance Tax

If you opt for presumptive taxation under Sec 44AD of the Income Tax Act, you must pay the advance tax (the whole amount) in a single installment on or before 15 March of the previous year.

If you fail to pay the advance tax before this date, you will have to pay the applicable interest amount according to Section 234C

Who is Eligible for the Tax Benefits Under Section 44AD of the Income Tax Act?

The following taxpayers are eligible to opt for the tax benefits under Sec 44AD of the Income Tax Act.

• Resident Individuals

• Resident Partnership Firms, except Limited Liability Partnership Firms

• Resident HUF (Hindu Undivided Family)

Who is Not Eligible for the Tax Benefits Under Section 44AD of the Income Tax Act?

Individual Taxpayers

The following taxpayers cannot opt for the tax benefits under Sec 44AD of the Income Tax Act.

• Non-Resident Indians.

• Individuals who have claimed deductions under Section 10A, 10AA, 10B or 10BA.

• Individuals who have claimed deductions under Section 80HH to Section 80RRB.

• Individuals engaged in an agency business.

• Individuals earning a commission or brokerage.

• Insurance agents.

• Individuals engaged in a profession as detailed under Section 44AA(1).

Businesses

The following businesses cannot opt for the tax benefits under Sec 44AD of the Income Tax Act.

• Businesses engaged in hiring, plying, or leasing goods carriages specified under Section 44AE.

• Businesses whose annual turnover or gross receipts exceed ₹2 crores. (Conditions apply - discussed in the next section).

Factors to Consider for Section 44AD of the Income Tax Act

Not Required to Maintain Books of Accounts

According to Section 44AA, if you are engaged in a business or profession, you must maintain books of accounts.

If you have opted for the presumptive taxation under Section 44AD and declare the business income at 8% or 6% of the annual turnover, you don't have to maintain books of accounts.

Deductions

Generally, taxable income for businesses is computed after deductions corresponding to business expenses are allowed.

In the case of presumptive taxation under Section 44AD of the Income Tax Act, the presumptive income is the final income, and no other deductions or expenditures are allowed.

No separate deduction for depreciation will also be applicable. However, the written-down asset value in the business can be determined as if depreciation under Section 32 was claimed and allowed.

Filing Income Tax Returns (ITR)

You can file your ITR using the form ITR-4. It is a simplified version of the tax filing process for tax relief under Section 44 of the Income Tax Act.

Payment of Income Tax

If the taxable income exceeds the minimum exemption limit, the tax liability is calculated on the taxable income depending on the applicable income tax slab rates. 

Benefits of Presumptive Taxation Under Section 44AD

Simplified Record-Keeping -

You don't have to maintain complex profit and loss statements and maintain books of accounts for your business.

Timely Audits are not Required -

You don't have to go through the detailed audit processes at regular intervals.

Saves Time and Effort -

The simplified process saves a lot of time and effort, especially when filing Income Tax Returns.

Cost-Effective -

You may not need additional staff or systems to maintain your finances, which can reduce many of your business expenses.

Drawbacks of Section 44AD of the Income Tax Act

Calculation is Regardless of Expenses or Losses Incurred -

Under Sec 44AD of the Income Tax Act, income is calculated based on prescribed rates irrespective of the expenses or losses incurred. This is a cause for concern for businesses with higher operational costs.

Applicable only to Specified Businesses -

The tax relief under Section 44AD is not applicable to certain businesses, such as agency businesses.

Turnover Limit -

The tax benefit under Section 44AD applies only to businesses with a turnover within the specified limit.

5-Year Lock-In Period -

If you opt for the presumptive taxation scheme, you have to continue it for the next five years. If you choose not to use the scheme, you may not be able to benefit from the tax relief under Section 44AD for another 5 years.

How Can You Reduce Your Income Tax?

If you are earning an income from a business or profession, you may benefit from the tax relief provided under Section 44AD of the Income Tax Act.

In addition, you can also reduce your income tax liability by claiming a deduction under various tax provisions, such as Section 80C and Section 80D of the Income Tax Act.

Section 80C provides a tax deduction for certain specified expenses and also for the amount spent on other savings and investment schemes. On the other hand, Section 80D provides tax deduction benefits exclusively for the amount spent on paying health insurance premiums.

Also Read: ​Section 80D Health Insurance Tax Deductions

Reliance General Insurance offers various health insurance plans online, catering to the specific requirements of individuals and families. So, if you are engaged in running a business and want to keep yourself secure from unexpected health expenses, purchase a health insurance policy with us.

Frequently Asked Questions About Section 44AD of the Income Tax Act

• What should be the annual turnover to qualify for Section 44AD tax relief?

  The annual turnover of the business should not exceed ₹2 crores to be eligible for Section 44AD of the Income Tax Act. This threshold limit is increased to ₹3 crores if 95% of the transactions are executed through the online mode.

• What happens to the threshold limit for annual turnover under Section 44AD if I run multiple businesses?

  If you run multiple businesses, the total turnover from all the businesses for the financial year will be considered when claiming tax relief under Section 44AD.

• How do you file income tax under Section 44AD?

  You can file Income Tax Returns using the ITR-4 form to declare the profits on a presumptive basis under Section 44AD for the applicable benefits.

• Should I maintain a book of accounts if I opt for the presumptive taxation 44AD?

  No, you are not required to maintain a book of accounts for your business if you opt for the presumptive taxation under Section 44AD.

• Should I get my business finances audited for tax relief under Section 44AD?

  No, auditing your business financial reports is not mandatory to avail of the tax relief under Section 44AD.

• Can I utilise the tax benefits of both Section 44AD and Section 44ADA?

  Yes, you can take advantage of both Section 44AD and Section 44ADA if you have income from both a business and a profession.

Disclaimer:

*T&C Apply. For more details on risk factors, terms conditions, brochure, and exclusions, please read the policy wording and CIS carefully before concluding a sale.

Tax benefits are subject to conditions under Section 80D of the Act and amendments thereof. The tax laws are subject to amendments/changes from time to time. Please consult your tax advisor for details.