As per the Income-tax Act, a person engaged in business or profession is required to maintain regular books of account and further, he has to get his accounts audited.

To give relief to small taxpayers from this tedious work, the Income-tax Act has framed the Presumptive taxation scheme under sections 44AD, 44ADA and 44AE.

The Presumptive Taxation Scheme offers the following features:

  1. Designed for small tax-payers
  2. Declare Income at specified rates
  3. No need for maintaining accounts and audit

Presumptive Taxation Scheme of Section 44AD

For whom the presumptive taxation scheme of section 44AD is designed?

The presumptive taxation scheme of section 44AD is designed to give relief to small taxpayers engaged in any business (except the business of plying, hiring or leasing of goods carriages referred to in section 44AE).

The presumptive taxation scheme of section 44AD can be adopted by following persons :

  1. Resident Individual
  2. Resident Hindu Undivided Family
  3. Resident Partnership Firm (not Limited Liability Partnership Firm)

To whom does 44AD not apply?

  1. LLP
  2. Non-resident
  3. Any person other than an individual, a HUF or a partnership firm
  4. Any person claiming deductions u/s 10A/10AA/10B/10BA or u/s 80HH to 80RRB in the relevant year.
  5. Any person engaged in the business of plying, hiring or leasing of goods carriages referred u/s 44AE
  6. A person who is carrying on any agency business.
  7. A person who is earning income in the nature of commission or brokerage
  8. A person engagaed in profession as defined u/s 44AA(1)
  9. If the total turnover or gross receipt of the business exceeds Rs. 2,00,00,000 then the scheme of section 44AD cannot be adopted.

What is the scheme of 44AD?

  • In case of a person adopting the provisions of section 44AD, Income will be computed on presumptive basis, i.e., @ 8% of the turnover or gross receipts of the eligible business for the year.
  • In other words, in case of a person adopting the provisions of section 44AD, income will not be computed in normal manner i.e., Turnover less Expenses, but will be computed @ 8% of the turnover.
  • Income at higher rate, i.e., higher than 8% can be declared if the actual income is higher than 8%.
  • The income computed @ 8% will be the final taxable income of the business covered under the presumptive taxation scheme and no further expenses will be allowed or disallowed.
  • Separate deduction on account of depreciation is not available. However, the written down value of any asset used in such business shall be calculated as if depreciation as per section 32 is claimed and has been actually allowed.
  • 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 maintenance of books of account will not apply.
  • Liable to pay whole amount of advance tax on or before 15thMarch of the previous year. If he fails to pay the advance tax by 15th March of previous year, he shall be liable to pay interest as per section 234C. Any amount paid by way of advance tax on or before 31st day of March shall also be treated as advance tax paid during the financial year ending on that day.
  • A person can declare income at lower rate (i.e., at less than 8%), however, if he does so, and his income exceeds the maximum amount which is not chargeable to tax, then he is required to maintain the books of account as per the provisions of section 44AA and has to get his accounts audited as per section 44AB.
  • If a person opts for presumptive taxation scheme then he is also required to follow the same scheme for next 5 years. If he fails to do so, then presumptive taxation scheme will not be available for him for 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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