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Presumptive Taxation Scheme Under Section 44AD: A Complete Guide

Businesses are required to maintain a detailed book of accounts, with a profit & loss statement, which gets evaluated at the year (financial year) end, on the basis of which the taxable income and corresponding tax is calculated. To give some relief to small assesses, the government has introduced a scheme referred to as Presumptive Taxation Scheme that offers reduced compliance burden. Those adopting the provisions under Section 44AD do not have to maintain the regular books of accounts and are exempt from getting their books of accounts audited.

Eligibility Criteria to get Benefits under Section 44AD

The following persons are eligible to opt for the presumptive taxation scheme of Section 44AD:

Resident Individual
Resident Hindu Undivided Family
Resident Partnership Firm (with the exclusion of Limited Liability Partnership (LLP) Firms)

The following persons are not eligible to opt for the presumptive taxation scheme of Section 44AD:

Any firm or person that has made a claim for deductions under Sections 80HH to 80RRB or under Sections 10AA or 10A or 10B or 10BA during an assessment year.
Businesses engaged with hiring, plying or leasing of goods carriages, as referred to under Section 44AE.
A person running an agency business.
A person earning income in the nature of commission or brokerage.

Presumptive Taxation Scheme

A resident who is an individual or HUF or Partnership firm (excluding Limited Liability Partnership firm) engaged in following professions can be part of the Presumptive Taxation Scheme - engineering, architecture, accountancy, legal, medical, technical consultancy, interior decorator, films artist, information technology and certain sports-related persons. This section applies to professionals whose total gross receipts do not surpass Rs. 50 lakhs during a financial year.

An essential point to be noted is that the income will be based on an estimation for those who meet the criteria and want to benefit from the Presumptive Taxation Scheme. Under this section, 8% of the turnover for the previous year will be considered as income or profits of the person. In case of professionals, 50% of their total gross receipts shall be considered as income.

Another important point is that the person or firm who avails the benefits of Section 44AD does not have to pay advance tax. During F.Y 2016-17, persons opting for this scheme under Section 44ADA were required to pay advance tax in four instalments, however, in F.Y 2017-18 such persons only had to pay advance tax in one instalment, on or prior to 15th March of the financial year.

An assessee who wants to take advantage of Section 44AD is not allowed to claim any deduction under Sections 30 to 38 (including depreciation or unabsorbed depreciation). However, the written down value - value of an asset after factoring depreciation - of an asset used in such business will be calculated as if depreciation under Section 32 is claimed and actually allowed.

Declaring Lower or Higher Income

As per the Presumptive Taxation Scheme, income is calculated on presumptive basis at the rate of 8% of the turnover. Should the gross receipts be received via cheque or bank draft or through an electronic clearing system during the previous year, then income will be computed at the rate of 6% rather than 8%.

The moment an eligible assessee is engaged in an eligible business, Section 44AD automatically becomes applicable to such business. In a situation where the assesses actual business income is less than 8% of gross receipts or turnover (the presumptive income as declared under the presumptive taxation scheme of Section 44AD), then there is no relief on maintaining the books of account as per the scheme. Should the actual income be high when compared with the presumptive income scheme, this provision allows the assessee to declare the higher income at his option (greater than the prescribed rate of 8%).

Frequently Asked Questions

What is Section 44AD of Income Tax Act?

Who is eligible to take advantage of the presumptive taxation scheme of Section 44AD?

The following persons are eligible to opt for the presumptive taxation scheme of Section 44AD:

Resident Individual
Resident Partnership Firm (with the exclusion of LLP)
Resident Hindu Undivided Family

The following persons are not eligible to opt for the presumptive taxation scheme of Section 44AD:

Any firm or person that has made a claim for deductions under Sections 80HH to 80RRB or under Sections 10AA or 10A or 10B or 10BA during an assessment year.
Businesses engaged in hiring, plying or leasing of goods carriages, as referred to under Section 44AE.
A person running an agency business.
A person earning income in the nature of commission or brokerage.

How is income computed on presumptive basis under Section 44AD of Income Tax Act?

As per the Presumptive Taxation Scheme, income is calculated on presumptive basis at the rate of 8% of the turnover. Should the gross receipts be received via cheque, bank draft or through an electronic clearing system during the previous year, then income will be computed at the rate of 6% rather than 8%.

Is it possible for an individual declare his profit under Section 44AD?

Yes, an individual can declare his profit under Section 44AD. The following entities can adopt the presumptive taxation scheme of Section 44AD:

Resident Individual
Resident Hindu Undivided Family
Resident Partnership Firm (with the exclusion of Limited Liability Partnership (LLP) Firms)

Non-residents or any entity other than individuals, a HUFs or partnership firms cannot adopt this scheme. Additionally, this scheme cannot be adopted by a person who has claimed towards deductions under Sections 10A/10AA/10B/10BA or under Sections 80HH to 80RRB in the relevant year.

Who is eligible to get the benefit under Section 44AD?

The following persons are eligible to opt for the presumptive taxation scheme of Section 44AD:

Resident Individual
Resident Hindu Undivided Family
Resident Partnership Firm (with the exclusion of Limited Liability Partnership Firms)

Will an insurance agent be allowed to adopt the presumptive taxation scheme?

No. A person whose income is through brokerage or commission cannot adopt the presumptive taxation scheme. Since insurance agents earn commission, they will not be able to adopt this presumptive taxation scheme.

How is taxable business income calculated in case of a person adopting the presumptive taxation scheme of Section 44AD?

Should an individual adopt the provisions of Section 44AD, his or her income will be computed on presumptive basis i.e. at 8% of the turnover or gross receipts of the eligible business for the year. Income shall be ascertained at 6% of gross receipts received via cheque or draft or through electronic clearing system.

What are the conditions associated with lower income or higher income?

As per the Presumptive Taxation Scheme, income is calculated on presumptive basis at the rate of 8% of the turnover. Should the turnover be received via cheque or bank draft or through an electronic clearing system during the previous year, then income will be computed at the rate of 6% rather than 8%.

The moment an eligible assessee is engaged in eligible business, Section 44AD automatically becomes applicable to such business. In a situation where the assesses actual business income is less than 8% of Gross Receipts or Turnover (the presumptive income as declared under the presumptive taxation scheme of Section 44AD), then there is no relief on maintaining the books of account as per the scheme. Should the actual income be high when compared with the presumptive income scheme, this provision allows the assessee to declare the higher income at his option (greater than the prescribed rate of 8%).

If I run a limited liability partnership firm, will it be possible to avail benefits under Section 44AD?

No, Limited Liability Partnership Firms cannot avail the benefits under Section 44AD.

How much is the maximum turnover limit to become eligible for Presumptive Taxation Scheme?

To opt for the Presumptive Taxation Scheme, the turnover cannot be more than Rs. 2 crores.