The Income-tax Act, 1961, provides various provisions to ease the tax compliance burden for small taxpayers, particularly for those engaged in business or profession. Under normal circumstances, taxpayers are required to maintain books of accounts, which can be a time-consuming and tedious task. To simplify tax calculations for small businesses, the Income-tax Act has introduced several presumptive taxation schemes, including those under Sections 44AD, 44ADA, 44AE, 44BB, and 44BBB. These schemes allow eligible taxpayers to declare their income on a presumptive basis, avoiding the necessity of maintaining extensive books of account. This blog discusses in the details of the presumptive taxation scheme under Sections 44AD, 44ADA, and 44AE, explaining who can benefit from them, their eligibility criteria, and the manner in which income is computed.
What is the Presumptive Taxation Scheme?
The presumptive taxation scheme is designed to provide a simplified way of calculating and paying taxes for small taxpayers. Under these provisions, eligible businesses and professionals can declare a fixed percentage of their gross receipts or turnover as income and pay taxes accordingly. By opting for this scheme, taxpayers are exempted from the arduous task of maintaining detailed books of accounts and are not required to undergo a tax audit unless they opt out of the scheme in later years.
The major benefit of the presumptive taxation scheme is that it reduces the compliance burden for small taxpayers, allowing them to focus more on their business or profession rather than on tax documentation. However, there are certain conditions and eligibility criteria that must be met to take advantage of this scheme.
Section 44AD – Presumptive Taxation for Small Businesses
Eligibility Criteria for Section 44AD
Section 44AD of the Income-tax Act is a provision that allows small businesses to opt for a simplified method of income calculation. It is applicable to the following taxpayers:
- Resident Individual – Only individuals who are residents of India can adopt this scheme.
- Resident Hindu Undivided Family (HUF) – A Hindu Undivided Family that is a resident can avail of this scheme.
- Resident Partnership Firm – Only resident partnership firms (excluding limited liability partnerships or LLPs) are eligible for this scheme.
This scheme is not available to non-resident taxpayers, and certain types of businesses are excluded from its provisions.
Exclusions from Section 44AD
Not all businesses are eligible for the presumptive taxation scheme under Section 44AD. The following types of businesses cannot avail of this scheme:
- Businesses related to plying, hiring, or leasing goods carriages – Such businesses are governed by the provisions of Section 44AE.
- Agency businesses – Businesses that involve agency work are excluded from this scheme.
- Income derived from commission or brokerage – Businesses that earn income from commission or brokerage are not eligible.
- Businesses with turnover exceeding Rs. 2 crore – If the turnover of the business exceeds Rs. 2 crore, it is not eligible for the scheme. However, there is an important exception: if the cash receipts in the business do not exceed 5% of the total receipts, the turnover limit increases to Rs. 3 crore (applicable from the assessment year 2024-25).
Additionally, taxpayers involved in professions listed under Section 44AA(1) are not eligible for the Section 44AD scheme. However, they can opt for the presumptive taxation scheme under Section 44ADA, which is designed specifically for professionals.
Income Computation under Section 44AD
Under Section 44AD, eligible taxpayers are required to compute their income on a presumptive basis, at a rate of 8% of their total turnover or gross receipts. This simplifies the income computation process as no detailed accounting is required. For businesses that receive payments through account payee cheques, drafts, or electronic modes, the rate of presumptive income is reduced to 6%.
Key Points for Income Computation under Section 44AD:
- The income is computed at a fixed percentage (8% or 6%) of the gross receipts or turnover.
- No further deductions for expenses related to the business are allowed under this scheme. However, the taxpayer can claim deductions under Chapter VI-A (e.g., under Sections 80C, 80D, etc.).
- Depreciation is not allowed as a separate deduction, but the written-down value of assets used in the business is calculated as if depreciation has been claimed and allowed under Section 32.
- If the actual income of the taxpayer is higher than the presumptive income (8% or 6%), the taxpayer can declare a higher income than the presumptive amount.
Section 44AD and Maintenance of Books of Account
A key benefit of adopting the presumptive taxation scheme under Section 44AD is that taxpayers are not required to maintain detailed books of accounts. The provisions of Section 44AA, which deal with the maintenance of books of account, do not apply to businesses covered under the presumptive taxation scheme.
Advance Tax and Section 44AD
Taxpayers opting for the presumptive taxation scheme under Section 44AD must pay the full amount of advance tax on or before 15th March of the assessment year. If they fail to make the payment by the due date, they will be liable to pay interest under Sections 234B and 234C. This provision ensures that taxpayers who have opted for the scheme pay their taxes on time.
Opting Out of the Presumptive Taxation Scheme
If a taxpayer opts for the presumptive taxation scheme under Section 44AD, they must follow the scheme for at least five consecutive years. If they fail to do so and opt out, they will not be eligible to avail of the benefits of the presumptive scheme for the next five assessment years. Additionally, the taxpayer will be required to maintain books of account and undergo tax audit under Section 44AB if their total income exceeds the prescribed limits.
For example, if a taxpayer chooses the presumptive taxation scheme for the assessment year 2019-20 and continues it for the next two years, but decides to opt out in 2022-23, they will not be able to claim the benefits of the scheme for the next five years, i.e., from 2023-24 to 2027-28.
Conclusion
The presumptive taxation schemes under Sections 44AD, 44ADA, and 44AE offer small businesses and professionals a simplified method of income computation, which helps reduce their compliance burden. By declaring income on a fixed percentage basis (8% or 6%), taxpayers can avoid the complexities of detailed record-keeping and tax audits, while still fulfilling their tax obligations. These schemes are designed to promote ease of doing business and are a valuable tool for small taxpayers.
However, it is essential to understand the eligibility conditions and the businesses that are excluded from these schemes. Also, taxpayers should carefully assess whether the presumptive taxation scheme is beneficial for their specific situation. By opting for the scheme, taxpayers can ensure timely compliance with tax provisions, making tax filing simpler and more efficient.
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