To reduce the tax burden and offer relief to taxpayers from multiple compliances, the Government of India incorporated a simplified scheme for businesses. Companies that opt for this presumptive tax scheme do not need to maintain regular books of accounts.
The presumptive scheme allows taxpayers to declare income at a prescribed rate as per the Income Tax Act, 1961. It, therefore, reduces time, effort, and compliance costs for companies. Read on to know more.
What is section 44AD?
Section 44AD of the Income Tax Act, 1961 was introduced to reduce the tax burden for smaller taxpayers.
Assessees opting for this section do not have to maintain regular books of accounts and are not required to audit their accounts.
The scheme aims to offer relief to small business assessees not included in Section 44AE.
From Budget 2020, this presumptive taxation scheme has been extended to offer benefits to professionals whose total annual income during a financial year does not exceed INR 50 lakhs.
Who is it for? Why is Section 44AD important?
The provisions of this section are available for the following assessees:
- Individual residents
- Partnership firms excepting limited liability partnerships
- Hindu Undivided Families (HUFs)
This section reduces the time and compliance costs for smaller businesses and professionals like doctors, lawyers, chartered accountants, and others.
Additionally, small companies do not need to maintain regular books of accounts and do not need to get their accounts audited, thus simplifying taxation.
What are the features of section 44AD of the Income Tax Act, 1961?
- Tax paid under sec 44AD of Income Tax Act, 1961 is calculated at the rate of 8% of the total gross turnover during the financial year provided the total gross turnover is less than INR 2 crores.
- The provisions are applicable for all professionals and businesses except those specified under section 44AE of the Income Tax Act, 1961.
- Income under this section will be taxed as per the applicable slab rate prescribed by the authorities.
- Assessees claiming benefits under this section are not allowed to claim any further expenses or depreciation except payments made to partners or interest.
Deductions and allowances u/s 44AD presumptive income scheme
- Assessees filing tax returns under section 44AD cannot claim deductions under Sections 30 to 38, which also includes depreciation expenses
- Partnership firms opting for the presumptive scheme can claim additional deductions under Section 40(B) for interest and remuneration paid to the partners; however, the deduction is capped as per the provisions of Section 40(B)
- If taxpayers choose to file returns under this section, then no disallowance as per Sections 40, 40A, and 43B are permissible
Provisions of section 44AD for eligible partnership firms
An eligible partnership firm can claim deductions on the interest amount paid to the partners and the remuneration as per the provisions of section 40(B) of the Income Tax Act, 1961.
However, thereafter, such partnership firms are not eligible for claiming deductions under sections 40, 40A, and 43B after computing income at the applicable rates.
It means that disallowances under sections 40, 40A, and 43B are not applicable for partnership firms that opt for presumptive income under the section 44AD scheme.
Declaration of lower and higher income under section 44AD
- All assessees are permitted to declare business earnings at less than 8% of their total turnover provided their business income does not exceed the permissible limit as per the provisions of this section.
- If a taxpayer declares business income at less than 8% of total turnover but the actual turnover during the financial year exceeds the permissible limit under section 44AD, then
- The taxpayer must maintain books of accounts as per the provisions of section 44AA.
- The books of accounts need to be audited according to the guidelines of Section 44AB.
- If the business income earned is more than the permissible limit under section 44AD, the assessees must declare higher income at a rate exceeding 8%.
Presumptive taxation for professionals under section 44ADA
If you are an interior decorator, engineer, lawyer, doctor, or any other professional, you can also opt for this presumptive income under section 44ADA.
The scheme aims to provide relief to Indian residents whose gross total income during the financial year is less than INR 50 lakhs. Professionals engaged in the following sectors are eligible.
Other professions specified by the Central Board of Direct Taxes (CBDT)
The following provisions are applicable if you opt for this scheme.
- Income is computed at 50% of total gross earnings during the year and no additional claims for deductions are admissible after declaring 50% profits; however, you can declare profits exceeding 50%.
- If you declare profits lower than 50% and the income is over the basic exemption limit, you need to maintain proper books of accounts and get these audited under section 44AB.
- The income computed for this presumptive scheme will be the final taxable income and no further expenditures will be allowed or disallowed.
Provisions of advance tax under section 44AD
Advance tax is the amount of tax paid during the year instead of what is paid at the end of the financial year.
It is categorized as ‘pay as you earn’ and the amount is payable in installments on or before the due dates as per the Income Tax Act guidelines.
All assessees opting for this presumptive taxation scheme are liable to pay the entire advance tax amount on or before March 15 of the financial year.
Written down value of depreciable assets under section 44AD
- Generally, assessees who opt to file their income tax returns (ITRs) under this section are not allowed to claim any additional deductions on extra expenses or depreciation.
- However, for any asset used by the business falling under section 44AD, its written down value (WDV) is computed such that the depreciation is permitted and can be claimed as per the provisions of section 32 of the Income Tax Act, 1961.
Eligibility criteria to file a return under section 44AD
- Any person or firm who does not claim tax deductions under sections 10A, 10AA, 10B, and 10BA in the Assessment Year (AY) is eligible to claim benefits under this section.
- Individuals or firms not claiming deductions under sections 80HH to 80RRB are eligible.
- Firms or individual assessees providing professional services and earning commission or brokerage income are eligible under sec 44ADA of the Income Tax Act, 1961.
Frequently Asked Questions (FAQs)
What is section 44AD of the Income Tax Act, 1961?
Under this section, smaller taxpayers whose income is less than the prescribed limit do not have to maintain regular books of accounts and are also not required to have these audited on the presumption that their profits are less than 8% of their total turnover.
However, taxpayers opting for this scheme are not allowed to claim deductions under sections 30 to 38 of the Income Tax Act, 1961.
From which year is section 44AD applicable?
Sections 44AD and 44AE were introduced by the Finance Act, 1994, and became effective from AY 1994–95.
However, there have been several updates and the latest one was made in the Budget 2020.
What is presumptive income under section 44AD?
The section aims to provide relief and make the tax-filing procedure simpler for smaller assessees.
Under this presumptive income scheme, taxpayers are allowed to presume the minimum profits at prescribed rates of their total turnover, and auditing their books of accounts is not required.
Who can file returns under section 44AD?
The following assessees can file returns under this section:
- Resident individuals, partnership firms, and HUFs not claiming exemptions under sections 10A, 10AA, 10B, and 10BA of the Income Tax Act, 1961.
- The taxpayers’ annual gross total turnover during the previous year should not exceed the prescribed limits.
- Individuals or companies in the business of plying or hiring goods carriages are not eligible for this scheme.
- The assessees choosing this presumptive scheme must declare at least 8% as profits.
How is tax calculated under section 44AD?
Income is calculated as 8% of the total turnover and the assessees get relief from maintaining books of accounts.
The annual tax is then determined based on this income and tax is payable as per the prevalent slab rates.
How can you file ITR under section 44AD?
Assessees declaring profits under this presumptive scheme do not need to maintain their books of accounts as per the provisions of sections 44AD and 44AE.
They can use the simplified form ITR 4S to file their returns via the income tax e-filing portal.
Can you use sections 44AD and 44ADA together if you have a business and professional income?
Yes, if you earn income from business and profession, you can simultaneously use the benefits of both sections 44AD and 44ADA of the Income Tax Act, 1961.
If your status is Resident but not Ordinarily Resident (RNOR), can you file ITR under section 44ADA?
Since an RNOR is a resident taxpayer, you can file your ITR under section 44ADA.
Can a management consultant avail of the presumptive scheme under section 44AD of the Income Tax Act, 1961?
Yes, management consultants are not covered under the ‘excluded persons’ as per the provisions of Section 44AD, and therefore, they can file ITR under this scheme.
Can you file ITR 4 if you earn brokerage income for Assessment Year 2018 – 19?
No, if you earned brokerage income for AY 2018 – 19, you cannot file ITR 4. This form is for individuals having business income under section 44AD and brokerage is excluded as per the provisions of this section.
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