Section 44AD & 44ADA: Presumptive Taxation in 2023

To reduce the burden of compliance of small taxpayers, the govt provides for a scheme of Presumptive Taxation which is very easy to understand and comply with. Under the scheme of Presumptive Taxation, the small taxpayers are not required to maintain any books of accounts and their profits are presumed to be a certain percentage of the Total Sales.

This is a fairly old and useful scheme and various improvements have been brought in by the Govt at regular intervals so as to ensure that it remains helpful and easy to understand for the taxpayers. As per the current scheme of Presumptive Taxation, the profits of a business are assumed as follows:

To encourage businesses to receive payments digitally, the govt has also provided an incentive to Businesses who receive payments digitally. Profits on payment received digitally by businesses would be considered at 6% of the total amount received digitally. This incentive is applicable from Financial Year 2016-17 onwards.

For payments received in cash, the profits would continue to be considered at 8%. The above incentive is only provided to businesses under Section 44AD and not for Professionals or Transporters.

After computing the Profits, the business would be required to pay Tax on such Profits as per the Income Tax Slab rates applicable.

• Recommended Read: Income Tax Slab Rates

In case a taxpayer feels that his profits are lower than the profits computed under the above mentioned scheme of Presumptive Taxation or does no wish to opt for the above scheme of presumptive taxation, he can opt for the existing scheme of taxation i.e. Profits = Sales – Expenses.

The following article explains in detail the provisions of presumptive taxation for Businesses under Section 44AD and for Professionals under Section 44ADA. For provisions of presumptive taxation for Transporters under Section 44AE, you may refer this article – Section 44AE: Tax @ Rs. 7500 per vehicle for Transporters

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. 2 Crore. In case the total turnover, of the assessee is more than Rs. 2 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..

Moreover, if an assessee is applying section 44AD, 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.

Amendments introduced in Section 44AD vide Finance Act 2016

Several other amendments have also been introduced in Section 44AD in Finance Act 2016 and these would be applicable from Financial Year 2016-17 onwards:-

1. The Salary/ Remuneration/ Interest paid to Partners would also not be allowed to be claimed as a deduction.
2. Businesses claiming benefit of Section 44AD would also be required to comply with the provisions of Advance Tax. However, to keep the compliance at minimum in such cases – the business would be required to pay 100% of the tax applicable by 15th March of the Financial Year. No other provisions of Advance Tax would apply in this case.

Amendments introduced in Section 44AD vide Finance Act 2017

To encourage business to receive payments digitally, the govt has also decided to give several incentives to businesses who receive the payments digitally. One such incentive is that if a business receives payments digitally, he can claim his Income to be 6% of the total payments received digitally i.e. through Cheque/ Demand Draft/ Debit Cards/ Credit Cards/ NEFT/ RTGS or any other Cashless mode.

For all payments received digitally, the profits would be assumed at 6% of such payments provided the payment is received during the year or before the due date of filing of Income Tax Return under Section 139(1).

This incentive was announced in 2016 after the Demonetisation of Currency and is applicable from Financial Year 2016-17 onwards.

For all payments received in cash, the assumed profit percentage would be remain the same i.e. 8%.

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. Section 44AD wont apply in case of Agency Business as well as in case of a business earning income from Commission or Brokerage.
3. As Section 44AD specifically mentions the word business, therefore section cannot be applied in case of professionals.
4. Section 44AD only applies in case of Individuals, Partnership & HUF provided they are Resident in India. NRI’s cannot claim the benefit of this scheme. This scheme also 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 6%/8% as the case may be. The assessee may choose not to opt for the scheme and may declare an income lower than 6%/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.

Opting in or out of Section 44AD for Businesses

Any person who is eligible to avail the benefit of Section 44AD as per the eligibility mentioned above can at any time opt for the scheme of Presumptive Taxation.

Moreover, a person can also opt out of this at any time. However, as per the latest amended laws – if a person opts out of the scheme of Presumptive Taxation of Section 44AD, 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

In case a person opts out of the provisions of Section 44AD – he would also be required to get his accounts audited under Section 44AB by a Chartered Accountant.

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 4 – 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. (Refer: Tax Implications if Professional Receipts are more than Rs. 50 Lakhs)

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. No other deduction for expenses would be allowed to the assessee and it would be deemed that he has already claimed the deductions for all expenses.

The assessee would also NOT be required to:-

1. Maintain books of accounts under sub-section (1) of Section 44AA, or
2. Get the accounts audited under Section 44AB in respect of such income.

However, in case the assessee claims that the profits and gains are lower than 50% – he would be required to prepare Books of Accounts under Section 44AA, maintain receipts of all expenses and get his accounts audited by a Chartered Accountant.

Opting in and out of Section 44ADA

A person can opt in and opt out of Section 44ADA at any time without any restriction. Unlike Section 44AD for Business, a professional can opt in and opt out at any time without the 5 year restriction. This has been explained in the below table:-

A professional would only be required to get his books audited if he discloses his income as less than 50%. In case he opts out of Section 44ADA – in this case as well he would not be required to get his accounts audited.

e-Book on Presumptive Taxation for Business & Professionals

Section 44AD and Section 44ADA are very important sections with huge practical implications. Moreover, there have been several recent changes in the scheme of Presumptive Taxation.

If you wish to understand How Businesses & Professionals can take benefits of showing Income under Presumptive Taxation under Section 44AD & Section 44ADA – you shall refer to this e-book which explains in detail and in simple words with examples the following aspects:

1. Businesses/ Professionals which are eligible/ not eligible to claim benefit u/s 44AD, 44ADA
2. Benefits of filing ITR under this scheme of Presumptive Taxation
3. Books of Accounts to be maintained
4. How to file ITR online
5. Powers of the Income Tax Officer to issue Scrutiny Notice
6. Examples and 10 Illustrations
7. Latest Changes

This latest updated e-Book on Presumptive Taxation for Business & Professionals can be purchased for Rs. 97 only from this link – Purchase e-Book on Presumptive Taxation for Business & Professionals