Section 44AD: Presumptive Taxation Scheme

Last Updated On: Aug. 29, 2020, 8:18 p.m.
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PRESUMPTIVE TAXATION SCHEME UNDER SECTION 44AD

Meaning of Presumptive Taxation Scheme:

As per the Income Tax Act, any person engaged with business/Profession is required to maintain books of accounts and get his accounts audited. To give relief for small taxpayers from their monotonous work, The IT Act has inserted the presumptive taxation scheme under section 44AD.

Who is eligible to adopt this scheme?

The presumptive taxation scheme of section 44AD is framed in order to provide relaxation to small taxpayers engaged in any business except the business of plying, hiring, or leasing of goods carriages.

The presumptive taxation scheme can be adapted by the following persons:

  • Resident Individual
  • Resident Hindu Undivided Family
  • Resident Partnership Firm

This scheme is not applicable for any person who has made any claim towards deductions under section 10A/10AA/10B/10BA or under sections 80HH to 80RRB in the relevant year.

The scheme of section 44AD is inserted to give relaxation  to small taxpayers engaged in any business, except for the following business:

  • Business of plying, hiring or leasing of goods carriages referred to in section 44AE.
  • A person who is carrying on any agency business.
  • A person who is earning income in the nature of commission or brokerage

 

COMPUTATION OF TAXABLE INCOME AS PER NORMAL PROVISION:

As per the Income-tax Act, the taxable business income of every person is computed as follows: (in case of a person not adopting the presumptive taxation scheme of section 44AD)

In order to compute taxable income as mentioned below, the taxpayers have to maintain books of accounts of the business. Income will be computed on the basis of information revealed in the books of accounts

Particulars Amount
Turnover or gross receipts from the business XXXXX
Less: Expenses incurred in relation to earning of the Income (XXXXX)
Taxable Business Income XXXXX

 

 

COMPUTATION OF TAXABLE INCOME IN CASE OF A PERSON ADOPTING THE PRESUMPTIVE TAXATION SCHEME OF SECTION 44AD:

In case of a person adopting the provisions of section 44AD, income is computed on a presumptive basis at the rate of 8% of the total gross receipts of the business year.

To promote digital transactions and to encourage small unorganized business to accept digital payments, section 44AD is amended with effect from the assessment year 2017-18.

To provide that income, it shall be computed at the rate of 6% instead of 8% if the turnover/gross receipt is received by an account payee cheque or an account payee bank draft or use of electronic clearing system through a bank account or through such other electronic mode as may be prescribed during the previous year or before the due date of filing of return under section 139(1).

Expenses will not be allowed or disallowed under this section:

Under the normal provisions of the Income-tax Act, taxable business income will be computed after allowing deduction in respect of expenses which are deductible as per the Income-tax Act and after disallowing expenses which are not deductible as per the Income-tax Act.

In case of a person who is opting for the presumptive taxation scheme of section 44AD, the provisions of allowance/disallowances as provided for under the Income-tax Act will not apply and income computed at the presumptive rate of 6% or 8% will be the final taxable income of the business covered under the presumptive taxation scheme.

 

Section 44AA: No need to maintain books of accounts

Section 44AA is related to the provisions of maintaining books of account by any person who is a resident engaged in business/profession. According to section 44AA, a person engaged in business/profession has to maintain books of account

In case of a person engaged in a business and opting for the presumptive taxation scheme of section 44AD, the provisions of section 44AA relating to the maintenance of books of account will not be applicable.

 

PAYMENT OF ADVANCE TAX:

Any person opting for the presumptive taxation scheme under section 44AD is liable to pay the whole amount of advance tax on or before 15th March of the previous year. If he fails to pay the advance tax by 15th March of the previous year, he shall be liable to pay interest as per section 234C.

 

CONSEQUENCES OF OPTING PRESUMPTIVE TAXATION SCHEME OF SECTION 44AD:

  • If a person opts for the presumptive taxation scheme then he is also required to follow the same scheme for the next 5 years.
  • If a person has failed, then the presumptive taxation scheme will not be available for him for the next 5 years. 
  • He is required to keep and maintain books of account and he is also liable for tax audit as per section 44AB from the AY in which he opts out from the presumptive taxation scheme.
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