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Scheme of Presumptive Taxation -Section 44AD

Section 44AD provides for the scheme of Presumptive Taxation. Any person opting for Section 44AD is not required to maintain regular books of accounts and further there is exemption from tax audit.

Section 44AD provides for calculation of income of the eligible assessee at a flat rate of 8% or 6% (in case receipts through cheque or electronic modes) of gross receipts/turnover of the eligible business.

Eligible assessee for Section 44AD

Only following assesses if Resident in India are eligible assessees:
  • Individuals
  • HUF and
  • Partnership Firms (but not Limited liability partnerships)
Eligible Business for Section 44AD
  • Any business except the business of plying, hiring or leasing goods carriages as it is dealt with seperately u/s 44AE
  • Not applicable in case of agency business and business having income from commission and brokerage.
  • Total turnover or gross receipts of the business in the previous year should not exceed an amount of 2 crore rupees. (Prior to financial year 2016-17 this limit was Rs. 1 crore)
  • From the year 2016-17 (assessment year 2017-18) a new section 44ADA has been inserted to extend the scope of presumptive income scheme to professionals as well. Professionals having gross receipts not exceeding Rs. 50 lacs from their profession, can opt for this section & declare their net income at 50% of their total gross receipts.

Scheme of Section 44AD

Section 44AD is also termed as presumptive taxation as the income is calulated at an estimated basis.
  • For Business: 
    • The income is calculated at a flat rate @ 8% of total turnover/gross receipts of the eligible business.

    • From Financial Year 2017-18 the income is calculated at a flat rate of 6% of turnover received through a non cash mode (ie. by an account payee cheque or an account payee bank draft or through elecronic payment mode) during the previous year or before the due date of filing of IT return.
  • For Profession: From the financial year 2016-17 (assessment year 2017-18) a new section 44ADA has been inserted to provide for presumptive income of profession @ 50% of gross receipts of the profession.

Various allowances & disallowances

Income calculated at the estimated basis of 8% or 6% is net income ie. net of all incomes & losses of business. Deduction for any business expenses under section 30 to 38 including depreciation or unabsorbed depreciation are not permitted to be claimed.

In a nut shell income calculated on estimated basis under section 44AD is net of all expenses, losses or disallowances.

Calculation of WDV of Depreciable assets

As explained earlier no deduction for depreciation is admissible when income is calculated under section 44AD. But WDV of  a depreciable asset will be calculated as if deduction of section 32 for depreciation is claimed & allowed. Thus we can say that though depreciation will not be allowed seperately but for the purpose of determining the WDV of an asset depreciation will be deducted.

Maintenance of Books of Accounts & Tax Audit

When income is calculated on an estimated basis no need to maintain books of accounts and no requirement of tax audit there.
  • There is no requirement to maintain books of accounts as per Section 44AA when income is calculated on an estimated basis U/S 44AD.
  • However if income to be disclosed is less then 8% or 6% of total turnover but exceeds the basic exemption limit ( Rs. 250000 for AY 2019-20)  books of accounts need to be maintained and requirement to get Tax Audit done will also be there.
  • However if income to be disclosed is less then 8% or 6% of total turnover and do not exceed the basic exemption limit (Rs. 250000 for AY 19-20) requirement to maintain books of Accounts and Tax Audit will not be attracted.
Opting out of Section 44AD & Declaration of lower Income

When actual income of the business is lower than the prescribed limit of 8% or 6%, lower income can be declared. The point of consideration is that when income is to be declared at a lower rate and if such income is within taxable range ie. exceeds the basic exemption limit (maximum amount not chargeable to tax), maintenance of books of accounts will be required as per Section 44AA & further tax audit u/s 44AB will also be required.

Detailed provision for opting out of Section 44AD says:
  • If once benefit of Section 44AD is taken by declaring income @ 8% or 6% and during any of the next five years the income is not declared at 8% or 6%, then benefit of section 44AD can not be claimed for the next five years to the year in which income is not declared according to Section 44AD.
In simple words if you opt out of the scheme of Section 44AD with in five years of opting in, you can not opt for same for next five years and if your income exceeds the basic exemption limit you will also be required to maintain books of Account u/s 44AA & get  Tax Audit  done u/s 44AB.

Advance Tax

From assessment year 2017-18 businesses declaring profit on estimated basis u/s 44AD are required to pay advance tax. Accordingly eligible assessee shall be required to pay advance tax. However, in order to keep the compliance minimum in this case, 100% advance tax should be paid by 15th March of the financial year.

Other Impotant Points:
  • In case of more than one business, total turnover from all the businesses shall be taken together.
  • In case of income from business as well as from profession, both should be dealt separately.
  • Deduction of Chapter VI A (for tax saving investments) can be claimed.
  • Income under this section is taken as income under the head income from business & profession.

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Due dates/last dates for Advance Tax payment
How to Calculate Advance Tax payable?
Interest u/s 234B for default in payment of Advance Tax
Interest u/s 234C for default in payment of Advance Tax instalment

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