Presumptive Taxation Scheme for Business Section 44AD of Income Tax Act

September 21, 2023 deeppatelj Taxation

A brief overview of the provisions, benefits, and limitations of the scheme for small taxpayers

Introduction

The Income Tax Act, India, has provisions to simplify taxation for small taxpayers and business owners. Section 44AD, also known as the Presumptive Taxation Scheme, is one such provision designed to relieve taxpayers from maintaining detailed accounts and undergoing audits. In this article, we will delve into the intricacies of Section 44AD, exploring its provisions, eligibility criteria, benefits, and limitations.

Presumptive Taxation Scheme for Business Section 44AD of Income Tax Act

Provisions

The presumptive taxation scheme under Section 44AD allows eligible taxpayers to declare their income from any business (except the ones specified in the section) at a prescribed rate of 8% for non-digital transactions or 6% for digital transactions, irrespective of the actual profits or losses incurred by them.
The scheme is applicable only to resident individuals, Hindu undivided families (HUFs), and partnership firms (not limited liability partnership firms) whose total turnover or gross receipts from the business does not exceed Rs. 2 crores in a financial year.
The scheme is not applicable to persons who have claimed deductions under sections 10A/10AA/10B/10BA or under sections 80HH to 80RRB in the relevant year.
The scheme is also not applicable to persons who are carrying on any agency business, commission or brokerage income, or profession as referred to in section 44AA(1) of the Income Tax Act.
The scheme is optional and the taxpayer can opt in or out of it from year to year. However, if a taxpayer opts out of the scheme after opting in for any year, he cannot opt back in for the next five years.

Benefits

The main benefit of the presumptive taxation scheme under Section 44AD is that it reduces the compliance burden on small taxpayers by exempting them from maintaining books of accounts and getting them audited as per section 44AB of the Income Tax Act.
The scheme also provides certainty and simplicity in tax calculation and payment as the taxpayer does not have to maintain any records or evidence of his expenses or deductions.
The scheme also allows the taxpayer to claim deductions under Chapter VI-A (such as section 80C, 80D, etc.) and rebate under section 87A on his presumptive income.
The scheme also enables the taxpayer to pay advance tax in one instalment on or before 15th March of the financial year instead of four instalments as per the normal provisions.

Limitations

The presumptive taxation scheme under Section 44AD also has some limitations that the taxpayer should be aware of before opting for it. Some of these are:
The taxpayer cannot claim any expenses or deductions related to his business income under sections 28 to 43C of the Income Tax Act. This means that he cannot claim depreciation, interest, rent, salary, etc. even if he has actually incurred them.
The taxpayer cannot set off any loss from his business (except loss from house property) against any other income under the same or different head. He can only carry forward his business loss for eight assessment years and set it off against his business income only if he opts out of the scheme.
The taxpayer cannot reduce his presumptive income by claiming any relief under sections 89/90/90A/91 of the Income Tax Act. He has to pay tax on his presumptive income at the normal rates applicable to him.
The taxpayer has to report his presumptive income in a specific form (ITR-4) and disclose his PAN, Aadhaar number, bank account details, cash deposits exceeding Rs. 2 lakhs, etc.