What Is the Presumptive Taxation Scheme Under Section 44AD?

The Presumptive Taxation Scheme under Section 44AD of the Income Tax Act, 1961, was introduced to simplify the tax filing process for small businesses and professionals. It is aimed at reducing the compliance burden for small businesses that have a relatively low turnover and do not maintain detailed books of accounts. Under this scheme, businesses are allowed to declare a certain percentage of their gross receipts or turnover as income, and they are not required to maintain detailed accounting records. This makes tax filing simpler and quicker.

Key Features of the Presumptive Taxation Scheme under Section 44AD:

Eligibility for the Scheme:

• The scheme is available for resident individuals, Hindu Undivided Families (HUF), and sole proprietors.
• The business must be a business, and not a profession (i.e., not applicable to professionals like doctors, lawyers, etc.).
• The annual turnover or gross receipts of the business should be less than ₹2 crore in a financial year.
• The business should not be involved in carrying on speculation business or agency business.
• For instance, small traders, manufacturers, and other businesses that meet these criteria can opt for Section 44AD.

Presumptive Income Calculation:

Under Section 44AD, 50% of the total turnover or gross receipts of the business is considered as the presumptive income. This income is then taxed at the applicable income tax rates.

For example, if a business has a turnover of ₹1 crore, 50% of this turnover (i.e., ₹50 lakh) is considered as income for tax purposes.

There is no need to maintain detailed books of accounts under this scheme, making it simpler for small businesses to comply with tax laws.

No Need for Detailed Books of Accounts:

One of the main advantages of this scheme is that businesses that opt for Section 44AD are not required to maintain regular books of accounts, such as a balance sheet, profit and loss account, or books of receipts and payments.

However, businesses are still required to keep records of receipts and payments and may need to provide a statement of accounts in case of audit.

Tax Rate:

The income under the Presumptive Taxation Scheme is taxed according to the regular income tax slabs.

• For individuals, HUFs, and proprietors below 60 years of age, the income is taxed as follows:
• Up to ₹2.5 lakh: No tax
• ₹2.5 lakh to ₹5 lakh: 5%
• ₹5 lakh to ₹10 lakh: 20%
• Above ₹10 lakh: 30%

The presumptive income is considered to be 50% of turnover, and the remaining 50% is assumed to be expenses.

No Further Deductions:

The businesses opting for the Presumptive Taxation Scheme under Section 44AD cannot claim any expenses or deductions under sections such as Section 30 to Section 38, which are typically available for businesses.

The 50% income is deemed to cover all business-related expenses (e.g., rent, salaries, materials, etc.).

Advance Tax:

Businesses opting for Section 44AD must pay advance tax if their total tax liability exceeds ₹10,000 in a financial year.

The advance tax payment is to be made in four installments—June 15, September 15, December 15, and March 15.

Exclusion from the Scheme:

• Businesses that have gross receipts of more than ₹2 crore in a year are not eligible for the Presumptive Taxation Scheme under Section 44AD.
• Additionally, professionals (e.g., doctors, lawyers, chartered accountants) cannot avail of the benefits of this scheme and must file their taxes according to the regular provisions under the Income Tax Act.

Example:

Scenario: A small retail shop with an annual turnover of ₹80 lakh opts for Section 44AD.

• Presumptive Income: 50% of ₹80 lakh = ₹40 lakh.
• The ₹40 lakh is considered as the taxable income for that year.
• The owner will then apply the regular tax rates to the ₹40 lakh, and the income will be taxed according to the applicable tax slabs.

Taxable Income:

If the taxable income is ₹40 lakh, the tax calculation would be as follows (for an individual below 60 years of age):

• ₹2.5 lakh to ₹5 lakh: 5% of ₹2.5 lakh = ₹12,500
• ₹5 lakh to ₹10 lakh: 20% of ₹5 lakh = ₹1,00,000
• ₹10 lakh to ₹40 lakh: 30% of ₹30 lakh = ₹9,00,000

Total Tax: ₹12,500 + ₹1,00,000 + ₹9,00,000 = ₹10,12,500.

Audit Requirements:

Businesses opting for Section 44AD are not required to undergo an audit unless their income exceeds ₹2 crore or if they are involved in certain other activities.

If the business’s gross receipts exceed the prescribed limit (₹2 crore), the taxpayer will have to undergo a tax audit.

Conclusion:

The Presumptive Taxation Scheme under Section 44AD simplifies the tax process for small businesses by allowing them to declare 50% of their turnover as income, without needing to maintain detailed books of accounts. This scheme is beneficial for businesses with a turnover of up to ₹2 crore and provides relief from the cumbersome process of accounting. It is crucial for eligible businesses to understand their eligibility, tax implications, and benefits under this scheme to ensure smooth compliance with income tax laws.