Presumptive Taxation Scheme of Section 44AD
To give relief to small taxpayers from the tedious job of maintenance of books of account and from getting the accounts audited, the Income-tax Act has framed the presumptive taxation scheme under sections 44AD, section 44ADA and section 44AE. In this part we will discuss about various provisions of the presumptive taxation scheme of section 44AD.
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.
A person adopting the presumptive taxation scheme can declare income at a prescribed rate and in turn, is relieved from tedious job of maintenance of books of account and also from getting the accounts audited.
The presumptive taxation scheme of section 44AD can be opted by the eligible persons, if the total turnover or gross receipts from the business do not exceed Rs. 2,00,00,000 p.a.
For whom the presumptive taxation scheme of section 44AD is designed?
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)
This scheme cannot be adopted by a person who has made any claim towards deductions under section 10A/10AA/10B/10BA or under sections 80HH to 80RRB in the relevant year.
Businesses not covered under the presumptive taxation scheme of section 44AD
The scheme of section 44AD is designed to give relief to small taxpayers engaged in any business, except the following businesses:
- 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
Apart from above discussed businesses, a person carrying on profession as referred to in section 44AA(1) is not eligible for presumptive taxation scheme.
The manner of computation of taxable business income in case of a person adopting the presumptive taxation scheme of section 44AD
- Income is computed on presumptive basis at the rate of 8% of the turnover or gross receipts of the eligible business for the year.
- Income shall be computed at the rate of 6% instead of 8% if 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 during the previous year or before the due date of filing of return under section 139(1).
Mr. A as gross turnover as follows:
- Rs. 700000 received by account payee cheque
- Rs. 150000 received by mode other than account payee cheque or an account payee bank draft or use of electronic clearing system through a bank account
Income shall be computed as follows:
700000*6% = Rs.42000
150000*8% = Rs.12000
Total Income Rs.54000
However, a person may voluntarily disclose his business income at more than 8% or 6%, as the case may be, of turnover or gross receipt.
The presumptive income computed as per the prescribed rate is the final income and no further expenses will be allowed or disallowed
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.
While computing income as per the provisions of section 44AD, 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.
If a person does not opt for the presumptive taxation scheme of section 44AD and declares income at a lower rate, i.e., at less than 8% or 6%
A person can declare income at lower rate (i.e., at less than 6% or 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.
Consequences if a person opts out from the presumptive taxation scheme of section 44AD
If a person opts for presumptive taxation scheme then he is also require to follow the same scheme for next 5 years. If he failed to do so, then presumptive taxation scheme will not be available for him for next 5 years.