Presumptive tax scheme under Section 44AD of Income Tax Act

Under the Income Tax law, businessmen and professionals are required to maintain regular accounts, which must be audited. However, the Amritsar Bench of the Income Tax Appellate Tribunal (ITAT) in November 2022 ruled that a taxpayer who availed of the presumptive taxation scheme under Section 44AD of the Income Tax (I-T) Act would have no liability to maintain books of account.

 

See also: Section 24 of Income Tax Act: Deductions on income from house property

 

Section 44AD of the Income Tax Act

Section 44AD of the Income Tax Act is a presumptive taxation scheme (PTS) meant to relieve small taxpayers from the maintenance of account books and getting their accounts audited. A person adopting PTS can declare his taxable income at a prescribed rate. The taxation process came into effect in the financial year 2016-17.

 

Section 44AD: Eligibility

• The PTS scheme is available for resident Indians only.
• Individuals, Hindu Undivided Families and partnerships can avail of the benefit. Limited liability partnerships are excluded.
• Those engaged in the business of plying, hiring or leasing goods carriages are excluded.
• Anyone engaged in an agency business or those earning commission or brokerage are not eligible.

 

Rate of tax

For those adopting Section 44AD, income is computed on a presumptive basis at the rate of 8% of the turnover or gross receipts of the eligible business for the year. Income is computed at the rate of 6% instead of 8% if turnover/gross receipt is received by an account payee cheque, account payee bank draft, electronic clearing system through a bank account or an electronic mode.

 

Section 44AD: Terms and conditions

Eligible taxpayers can only avail of PTS if the total turnover or gross receipt from business does not exceed Rs 2 crore. Professionals with less than Rs 50 lakh of gross receipts in a financial year are also under the umbrella of PTS.

Those opting for presumptive taxation under Section 44AD are not allowed a deduction for expenses under Sections 30 to 38.

 

Other noteworthy points

• Taxpayers who have opted for the PTS can pay the entire advance tax by March 15 of the financial year and do not have to pay advance tax following the quarterly schedule.
• Those opting for benefits under Section 44AD have to stick with it for 5 years. If they opt out of any assessment year, they cannot utilise it for five subsequent years.

 

How does presumptive taxation work?

Suppose a freelancer’s annual income is Rs 50 lakh and his work-related expenses are Rs 10 lakh. Without presumptive taxation, the freelancer can claim a tax deduction on work-related expenses. That makes the taxable salary Rs 40 lakh. Using presumptive taxation, the freelancer’s taxable income will be 50% of the total annual income, i.e., ₹25 lakh only.

 

FAQs

Is Section 44AD of the Income Tax Act applicable for NRIs?

No, Section 44AD of the Income Tax Act does not apply to NRIs.

Which ITR form applies to taxpayers availing of the PTS benefit?

Taxpayers opting for the PTS must use ITR-4 for filing their returns.

Who is considered a professional under Section 44AD?

The following people are considered professionals under Section 44AD:

Lawyers

Doctors

Technical Consultants

Architects

Interior Decorators

Engineers

Chartered Accountants