Section 44AD & 44ADA: Income of Business – 8%, Profession – 50%

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Budget 2016 Update: The benefit of Section 44AD has now been extended to Professionals as well. Any professional whose gross total receipts during the year are less than 50 Lakhs can make use of this Section and disclose Income equivalent to 50% of the Gross Receipts. 

This has been explained in detail below.

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As per Section 44AD of the Income Tax Act applicable from A/Y 2011-12, a taxpayer can assume his income to be 8% of his total turnover and pay tax on the income so computed.

Prior to A/Y 2011-12, this section was only applicable to the business of civil construction. However, it is now applicable to all types of businesses (except those specified below) and professions. This type of taxation is also known as presumptive taxation as income is presumed to be a specified percentage of the total turnover.

The income so computed by applying presumptive taxation would be liable to tax as per the income tax slab rates.

Section 44AD: Income presumed to be 8% of turnover

Under Section 44AD, income would be presumed to be 8% of the total turnover of the assessee, only if the total turnover of the assessee is less than Rs. 1 Crore. In case the total turnover, of the assessee is more than Rs. 1 Crore, income would be computed as per the normal provisions of the Income Tax Act (i.e. Revenue –Expense-Depreciation) and the assessee would also be required to get his accounts audited under section 44AB.

This limit of Rs. 1 Crore has been increased to Rs. 2 Crore in Budget 2016. This revised limit would be applicable from Financial Year 2016-17 onwards.

Moreover, if an assessee is applying section 44AD and assuming his income to be 8% of total turnover, he won’t be allowed to claim any expense or depreciation. Any deduction allowed under provisions of Section 30 to 38 shall, for the purpose of income computed under this section be deemed to have been already given full effect and no further deduction shall be allowed under these sections.

However, remuneration or interest paid to partners shall be allowed as deduction from the income computed under this section. Such deduction shall be subject to conditions and limits specified u/s 40(b).

The provisions of Chapter XVII-C relating to Advance Tax would also not apply in cases where section 44AD is applied.

Section-44AD

Applicability of Section 44AD

  1. Section 44AD applies to all businesses except the business of plying, hiring or leasing goods.   Section 44AD won’t apply in case of plying, hiring or leasing of goods as these have already been covered under section 44AE.
  2. As Section 44AD specifically mentions the word business, therefore section cannot be applied in case of professionals.
  3. Section 44AD only applies in case of Individuals, Partnership & HUF provided they are Resident in India. This section does not apply in case of Limited Liability Partnerships as they have been specifically excluded from this section.

If the taxpayer opts for filing his income tax return under this scheme, he can opt for disclosing his income tax return at any percentage above 8%. The assessee may choose not to opt for the scheme and may declare an income lower than 8% of the gross receipts. However in such a case, the assessee shall have to keep and maintain books of accounts and get his accounts audited by a chartered accountant.

Computation of Turnover for the purpose of Section 44AD

The following would form a part of turnover and would be included in the computation of turnover for the purpose of section 44AD

  1. VAT, Excise Duty, Cess and other Levy
  2. Sales of unusable empties and supplies
  3. Service Charges charged for delivery

However, the following will not form a part of the total turnover for the purpose of section 44AD

  1. Advance or deposits received
  2. Consideration received on sale of fixed assets
  3. Cash or other discounts

Other Relevant Points regarding Section 44AD

  1. In case an assessee is carrying on more than 1 business, the total turnover of all the businesses should be taken into account.
  2. However, if the assessee is carrying on business as well as profession, Section 44AD can be applied on the income earned from business. Computation of Income earned from Profession would be computed as per the normal provisions of the Income Tax Act.
  3. An assessee declaring his income as per presumptive taxation under section 44AD can also claim tax benefit of deductions under chapter VI-A

In case an assessee is applying presumptive taxation under section 44AD, he should file his income tax return in ITR Form 4S – Sugam

Section 44ADA: Presumptive Taxation @ 50% for Professionals

The benefit of Presumptive Taxation which was earlier available only to specified businesses has now been extended to Professionals. Professionals whose Total Gross Receipts do not exceed more than Rs. 50 Lakhs in a financial year can claim benefit of this Section from Financial Year 2016-17 onwards.

The Income of any person making use of this Section would be assumed to be 50% of the Total Gross Receipts for the year. The following are considered as professionals who can make use of this Section:-

  1. Legal
  2. Medical
  3. Engineering
  4. Architectural Profession
  5. Profession of Accountancy
  6. Technical Consultancy
  7. Interior Decoration

This scheme is applicable only to a resident assessee who is an Individual, HUF or Partnership but not a Limited Liability Partnership firm.

Under this scheme, the assessee would be deemed to have been allowed the deductions under Section 30 to 38. Accordingly, the written down value of any asset used for the purpose of the profession of the assessee would be deemed to have been calculated as if the assessee had claimed and had actually been allowed the deduction in respect of depreciation for the relevant assessment years.

It is also proposed that the assessee will not be required to maintain books of accounts under sub-section (1) of Section 44AA and get the accounts audited under Section 44AB in respect of such income unless the assessee claims that the profits and gains from the aforesaid profession are lower than the profits or gains deemed to be his income under sub-section(1) of section 44ADA and his income exceeds the maximum amount which is not chargeable to income tax.

Opting in or out of the Scheme of Presumptive Taxation

Any person who is eligible to avail the scheme of Presumptive Taxation as per the eligibility mentioned above can at any time opt for the scheme of Presumptive Taxation.

A person can opt out of the scheme of the above said scheme of Presumptive Taxation at any time. However, if a person opts out of the scheme of Presumptive Taxation, then he cannot avail the benefit of the scheme of Presumptive Taxation for the next 5 years.

The same has been summarised in the table below

Particulars Presumptive Taxation
AY 2017-18, 2018-19, AY 2019-20 Opts for Presumptive Taxation
AY 2020-21 Does not opt for Presumptive Taxation
AY 2021-22 to AY 2025-26 Cannot opt for Presumptive Taxation

 

A Personal Finance enthusiast, Karan is the founder of charteredclub.com and loves to discuss about Money related matters.