Section 44AD of income tax act states that tax will be charge on the basis of presumptive income of business. Section 44AD is a special provisions for computing profits & gains of business on presumptive basis.
What is Section 44AD of income tax act??
The provisions of the section 44AD, inter alia, provide for a presumption income scheme
for small businesses. under which a sum equal to 8% or 6% of the total turnover or gross receipt
is deemed to be the profits and gains from business, in case of certain assessees.
Further ,certain assessees means Individual, HUF, Partnership firm other than Limited liability partnership firm carrying business.
In brief, presumptive tax scheme was introduced to ease tax burden on small taxpayer or assessees. They are not required to maintain and show books of accounts .In other words, section 44AD provides relief to certain individual and professional , so they do not need to get an audit performed and show books.
Business whose total turnover or gross receipt is 2 crores or less can take benefit of this section.
Key features of section 44AD of income tax act??
- Presumptive scheme can be opted by eligible taxpayer or assessee’s, if total turnover or gross receipts from business does not exceeds 2 crores.
- Further, Tax paid by assessees under this section is calculated at 6% or 8% of total turnover or gross receipt.
- Income calculated under this provision is liable to tax in accordance with the slab rates.
- The provisions of this section will apply to all business except those referred in section 44AE.
- Assessees opting this scheme can not claim any deduction like depreciation or any further expenditure.
Section 44AD is applicable to whom i.e. who is eligible for this section??
A) Eligible Assessees for section 44AD
“eligible assessees” means
- an resident individual ,HUF, or partnership firm but not LLP firm; &
- who has not claimed deduction u/s 10A,10AA,10B,10BA or profit linked deduction;
B) Eligible Business for section 44AD for fy 2022-23
“eligible business” means
- any business except the business of playing,hiring or leasing goods carriages referred to in section 44AE; and
- Whose total turnover or gross receipt in the P.Y. does not exceed Rs. 2 crore.
C) Eligible Business for section 44AD for fy 2023-24 (ay 24-25) i.e. revised limit for opting this scheme
- any business except the business of playing, hiring or leasing goods carriages referred to in section 44AE; and
- Whose total turnover or gross receipt in the P.Y. does not exceed Rs. 3 crore
It is pertinent to note:
Increase in limit is subject to condition that 95% of receipts must be through bank or account payee cheque or any other electronic mode through bank. Further , If you do not continue this scheme for five years , you will lose the benefit of section 44AD.
Note:
Which deductions are not allowed under section 44AD?
All deductions allowable u/s 28 to 43C is deemed to have been allowed in full and no further deductions shall be allowed. And in case of firm salary & interest would not be allowed as deduction u/s 40(b).
In, other words , Expenses like depreciation ,office expenses and general expenses etc. are not allowed under this section.
What is the rate at which presumptive income is chargeable to tax?
A) Presumptive rate u/s 44AD of income tax act F.Y. 2022-23
| 6% | 8% |
| 1) Turnover or gross receipts received by an account payee cheque or account payee bank draft or use of electronic clearing system through bank or such other prescribed electronic mode. (Like NEFT or UPI etc). 2) during previous year or before due date u/s 139(1). | Any other mode of receipts : i) cash receipts or ii) aggregate of the amounts by a cheque drawn on a bank or by a bank draft, which is not account payee, shall be deemed to be the receipt in cash. |
Consequences of not declaring profit as per section 44AD of income tax act in any of next relevant assessment years
Where eligible assessee declares profit for any previous year in accordance with the provisions of section 44AD; and
he does not declare profit as per section 44AD ,
He shall not eligible to claim the benefit of the provisions of this section for five assessment years subsequent to the relevant assessment year in which the profit has not been declared , in accordance with the provisions of section 44AD.
In brief , If you are opting presumptive scheme , you must declare profit as per this scheme for at least 5 years in continuation.
It is pertinent to note:
If person opts for presumptive taxation scheme, then he is required to follow the same scheme for next five years . If he fails to do so , then presumptive taxation scheme will not be available for him for net five years.
Counting of five years will start from where you have not opted the presumptive scheme. This will discourage the taxpayer who misuse the scheme and constantly change their option.
Furthermore, if total income of assesses exceeds the maximum amount not chargeable to income tax, then he shall be required to keep & maintain such books of accounts & other documents as required u/s 44AA(2) and get them audited as required u/s 44AB.
Whether advance tax is applicable under section 44AD of income tax?
In addition, the person declaring income under section 44AD and 44ADA will also required to pay whole amount of tax on or before 15th march of the previous year. And if fails to pay advance tax by 15 the march of previous year he shall be liable to pay interest as per section 234C.
Section 44AD does not apply to whom??
The following person are specifically excluded from the applicability of the provisions of section 44AD :-
a) The person carrying profession as referred in section 44AA(1) i.e. Legal, Medical, Engineering, Architectural profession or profession of accountancy or interior decoration or any other profession notified by the board.
b) a person earning income in the nature of commission or brokerage for eg. Insurance agent; or
c) a person carrying on any agency business.
Frequently asked questions on section 44AD
1) Non resident can opt presumptive tax scheme u/s 44AD??
No, an resident individual ,HUF, or partnership firm, but not LLP firm can opt this scheme. It means resident individual is specifically excluded from this scheme.
2) what is turnover u/s 44AD??
Total turnover or gross receipt in the P.Y. does not exceed Rs. 2 crore for financial year 2022-23. And total turnover or gross receipt in the P.Y. does not exceed Rs. 3 crore for financial year 2023-24 subject to condition that 95% of receipt should be in electronic mode.
3) What happens when assesses carrying more than one business ??
Total turnover that all business earns during the financial year should be taken into consideration for computing income under this section.
4) Will the provisions of advance tax under section 44AD be applicable ??
Yes,the person declaring income under section 44AD and 44ADA will also required to pay whole amount of tax on or before 15th march of the previous year.
5) How to calculate tax u/s 44AD??
Let’s take an example , Mr. Varun carrying business total turnover during the financial year 2022-23 is Rs. 60,00,000. Out of this 80% of receipts are in electronic mode through bank and 20% of receipts are in cash so how he will calculate taxable income and tax liability for the year.
Now, Will calculate presumptive income under section 44AD i.e.
=> Rs. 48,00,000 is received through bank therefore income u/s 44ad is at 6% of 48,00,000 = 2,88,000
and => 12,00,000 is received as cash therefore income u/s 44ad is at 8% of 12,00,000 = 96,000
Total Income chargeable to tax under section 44AD is 2,88,000+96,000 i.e. Rs. 3,84,000.
and this 3,84,000 will be chargeable to tax as per slab rate applicable to individual.
And tax liability of Mr. Varun is 6,700 for ay 2023-24 (fy 2022-23).
6) What is presumptive income u/s 44AD??
In brief, the provisions of the section 44AD, inter alia, provide for a presumption income scheme
for small businesses. under which a sum equal to 8% or 6% of the total turnover or gross receipt
is deemed to be the profits and gains from business, in case of certain assessees.
Further ,certain assessees means resident individual, HUF, Partnership firm other than Limited liability partnership firm carrying business.
And they are not required to maintain and show books of accounts .In other words, section 44AD provides relief to certain individual and professional , so they do not need to get an audit performed and show books.
