Section 44AD of the Income Tax Act

Section 44AD of the Income Tax Act, 1961 deals with the presumptive taxation scheme for certain eligible taxpayers. The section applies to resident individuals, Hindu Undivided Families (HUFs), and partnerships having a turnover of up to ₹3 Crores in the previous financial year.

 

Under this section, eligible taxpayers can declare their income at a prescribed rate, which is a percentage of their total turnover, without maintaining detailed books of accounts. For example, if the turnover is ₹50 Lakhs, the income can be declared at a presumptive rate of 8% (for businesses) or 6% (for professionals) of the turnover, which amounts to ₹4 Lakhs or ₹3 Lakhs, respectively.

 

However, if a taxpayer declares their income under this scheme, they cannot claim any deductions or expenses against their income. The deemed income calculated at the prescribed rate is considered final, and no further adjustments are allowed.

 

It is important to note that this scheme is optional. Taxpayers can choose to declare their income under the regular taxation scheme by maintaining detailed books of accounts and claiming deductions.

The features of Section 44AD of the Income Tax Act, 1961 are as follows:

 

• Applicability of Section 44AD: The scheme is applicable to resident individuals, HUFs, and partnerships who have a total turnover of up to ₹3 Crores in the previous financial year.

• Presumptive taxation: Taxpayers who opt for this scheme can declare their income at a prescribed rate, which is a percentage of their total turnover, without maintaining detailed books of accounts.

• Presumptive rates: The prescribed rates for calculating income under this scheme are 8% of the total turnover for businesses and 6% of the total turnover for professionals.

• Deductions not allowed: Taxpayers who opt for this scheme cannot claim any deductions or expenses against their income. The deemed income calculated at the prescribed rate is considered final, and no further adjustments are allowed.

• No audit required: Taxpayers who opt for this scheme are not required to get their accounts audited.

• Optional scheme: Taxpayers can choose to declare their income under the regular taxation scheme by maintaining detailed books of accounts and claiming deductions.

• Penalty for under-reporting: If a taxpayer declares income lower than the prescribed rate, they will be subject to a penalty of 50% of the under-reported income.

• Advance tax: Taxpayers who opt for this scheme are required to pay advance tax in one installment on or before 15th March of the financial year.

 

Overall, the Section 44AD scheme simplifies the tax compliance process for small taxpayers by providing them with a presumptive taxation scheme with lower compliance requirements. However, it is important to carefully evaluate the benefits and limitations of the scheme before opting for it.

 

The Union Budget of 2023 revised the presumptive taxation limits under Section 44AD and Section 44ADA. The revised presumptive taxation limits for FY 2023-2024 (AY 2024-2025) as follows:

The following are the eligible candidates for Section 44AD:

 

• Resident Individuals: Resident individuals who are engaged in the business of trading, manufacturing or eligible professions are eligible to opt for the presumptive taxation scheme under Section 44AD.

• Hindu Undivided Family (HUF): Hindu Undivided Families (HUF) who are engaged in the professions mentioned above.

• Partnership Firms: Partnership firms, including Limited Liability Partnerships (LLPs), that are engaged in the business of trading, manufacturing or eligible professions can also opt for the presumptive taxation scheme under Section 44AD.

To be eligible to opt for this scheme, the following conditions must be met:

 

• Applicable to certain businesses: The scheme is applicable to taxpayers who are residents of India and are engaged in the business of trading, manufacturing, or eligible professions.

• Payment Method: The taxpayer should receive payments in the form of account payee cheques, account payee bank drafts, or use electronic clearing systems through a bank account.

• Turnover Limit: The total turnover or gross receipts of the business or profession should not exceed ₹3 Crores in a financial year. If the turnover exceeds ₹3 Crores, the taxpayer is not eligible to opt for the presumptive taxation scheme under Section 44AD.

• Eligible Professionals: For professionals such as doctors, lawyers, architects, etc. The scheme is applicable only if they have total gross receipts of up to ₹75 Lakhs in a financial year.

• No deductions allowed: The presumptive income calculated under Section 44AD is considered final and no further deductions or allowances can be claimed by the taxpayer against this income. The taxpayer is not required to maintain detailed books of accounts for such income.

Taxpayers who opt for the presumptive taxation scheme under Section 44AD are not required to maintain detailed books of accounts. However, they are required to maintain certain basic books of accounts, such as a cash book and a summary of the total turnover or gross receipts of the business or profession.

 

If the presumptive income of the taxpayer exceeds the maximum amount, the taxpayer will be required to file an income tax return for the financial year. In such cases, the taxpayer is also required to get their accounts audited by a qualified Chartered Accountant.

The limitations that a taxpayer could not choose the presumptive income scheme for five years will only be applied when he declares profits that are lower than 8% or 6%. The limitations of Section 44AD(4) do not apply if he/she is unable to choose a presumptive income scheme for any other reason.

Under this scheme, taxpayers can declare their income at a prescribed rate, which is a percentage of their total turnover, without maintaining detailed books of accounts. However, there is a 5-year lock-in period associated with this scheme.

 

The purpose of the 5-year rule is to discourage taxpayers from switching between the presumptive taxation scheme and the regular taxation scheme frequently. This is because frequent switching can lead to tax evasion and can make it difficult for the tax authorities to monitor the income and tax liabilities of taxpayers.

It is important to note that the 5-year lock-in period is applicable only to taxpayers who opt for the presumptive taxation scheme under Section 44AD. Taxpayers who declare their income under the regular taxation scheme are not subject to any such lock-in period.