What is Section 44AD and how to compute Income U/S 44AD

According to Sections 44AA of the Income Tax Act (1961), a person engaged in business or profession needs to maintain regular books of accounts under certain circumstances as per specific conditions. To relieve small taxpayers from such compliance burden, the Income Tax Act has framed the presumptive taxation scheme.

Section 44AD is one of the presumptive taxation scheme. This section provides tax relief to certain individuals and professionals so they don't need to get an audit performed or maintain their books. Person adopting the presumptive taxation scheme can declare income at a prescribed rate. The Act has laid out presumptive taxation schemes (for ITR-4 users) as given below: 

Section 44AD: Under this section, taxpayers having up to Rs 2 crore of turnover are not required to maintain books of accounts and declare 8% or 6%(in case of online transactions) of their turnover as profits. This scheme benefits small taxpayers who get relieved from maintaining the books of accounts and get them audited.

Note: In the Budget 2023, the finance minister proposed to increase the limit under section 44AD for businesses to Rs 3 crore, with the condition that if your cash transaction is up to 5% of turnover and also if the amount received by cheque or bank draft which is not account payee shall be deemed as amount received in cash.

Who is Eligible for Section 44AD?

The following tax assessee are eligible to use the provisions of Section 44AD's presumptive taxation scheme-

• Resident Individual taxpayers
• Partnership Firm
• Hindu Undivided Families

Note: This scheme cannot be used by such taxpayer who has made any claim towards deductions u/s. 10A/10AA/10B/10BA or 80HH to 80RRB in the FY.

Who cannot use presumptive taxation scheme under section 44AD:

• Business of plying, hiring or leasing of goods carriages referred to in section 44AE;
• Agency business;
• Commission or brokerage;
• Profession as referred to u/s. 44AA(1);
• A taxpayer whose gross receipts/total turnover in the FY exceeds Rs.3 Cr in case cash receipts during the FY exceed 5% of total turnover/receipts.

Computation of Taxable Income u/s 44AD

• 8% of the turnover: In this scheme, income is calculated presumptively based on a fixed rate of 8% of the turnover or gross receipts either the receipts are through electric mode or in cash mode.
  
  
• 6% of the turnover: In this scheme, income is calculated presumptively based on a fixed rate of 6% of the turnover or gross receipts in case the turnover or gross receipt is received through specific electronic means or by account payee cheque/bank draft.

• Minimum tax rate 8%/6%: The taxpayer has the option to voluntarily disclose business income at a rate higher than 8% or 6%, as applicable. By choosing to file returns under Section 44AD, but the taxpayer cannot go for lower tax rate i.e 8%/6%.

In case Taxpayer want to disclose income less then 8%/6% of Gross Receipt then it is mandatory to have a tax audit under 44AB & other ITR form need to be select.

• Deductions not allowed: In case taxpayer choosing to file returns under Section 44AD then the taxpayer is not allowed to claim deductions provided under Section 30 to Section 38 of the Income Tax Act. This includes depreciation and other deductions.

The income calculated using the prescribed rate in this presumptive taxation scheme will be considered as the final taxable income for the eligible business. No other expenses will be allowed or disallowed. Although no deduction is permitted for depreciation, the Written Down Value (W.D.V) of any asset used in the business will be calculated as if depreciation has been allowed.

Consequences of Opting Presumptive Taxation Scheme u/s 44AD

• Deduction under section 30 to 38 shall be deemed to have been allowed. 
• Written down value of any asset for the succeeding year shall be computed as if the assessee has claimed deduction. 
• Once the assessee has opted this scheme then he does not opt for this scheme in the subsequent 5 Asessment Year. 

Note: A firm is not entitled to deduction on account of interest and salary paid to the partners if it is covered under section 44AD & 44ADA. But this is allowed u/s 44AE

Consequences of opting out from Presumptive Taxation scheme

Once a taxpayer opts for presumptive taxation scheme, he is required to follow the same scheme for next 5 years. If he fails to do so, presumptive taxation scheme will not be available for him for next 5 years.

Example: Sumit Traders have gross receipts of Rs 1.3 Crore for FY 2018-19 and do not maintain books of accounts. Sumit traders have opted for presumptive taxation. During the year Sumit Traders received Rs. 80 Lakhs through non-digital transactions (cash payments) and Rs. 50 Lakhs through digital transactions. 
What will be the income under the head business and profession? 

Solution:

Income under the business and profession: 
For non-digital transactions : 80,00,000 * 8% = Rs. 6,40,000 
For digital transactions : 50,00,000 * 6% = Rs. 3,00,000 
Income under the head “Business or Profession” will be = Rs 9,40,000