In presumptive taxation scheme, an individual, HUF and partnership firm is required to disclose certain percentage or amount as their income instead of actual profit or loss.
We have following three sections under which presumptive business income can be calculated;
- Section 44AE – Applicable to the business of playing, hiring or leasing og goods carriage
- Section 44ADA – Computing presumptive income in case of professionals
- Section 44AD – Presumptive income in case of an individual, HUF and partnership firm carrying business.
Please remember, it’s not mandatory to calculate presumptive business income if your business is falling into these sections. You can calculate your tax liability based on the normal provisions of income tax act 1961 by claiming business expenses U/S 30 to 38 from your turnover or gross receipt.
In this article, we will be discussing calculation of business income on the basis of presumptive taxation scheme applicable to an individual, HUF and partnership firm carrying business under section 44AD.
Who is eligible for presumptive taxation scheme benefits U/s 44AD
As per section 44AD of income tax act,1961, businesses are eligible to opt for presumptive taxation scheme if their annual turnover or gross receipt does not exceed Rs. 2 Crore during the previous year.
However following businesses and persons are specifically excluded from the provisions of section 44AD;
- A person carrying on profession as specified in U/S 44AA.
- A person carrying business in the nature of commission or brokerage,
- A person carrying on any agency business.
- a business of plying, hiring or leasing of goods carriage business as specified in section 44AE.
- A limited liability partnership firm or LLP
- Private limited companies
- Public limited companies
- One person Companies or OPC
- Non residents
How to calculate estimated or presumptive income U/s 44AD
A business which satisfy all the conditions of section 44AD, can calculate 8% of the total turnover or any higher sum as their deemed income under the head “profits and gain of business or profession ”.
If the entire turnover or gross receipts of the business are received in banking mode, then instead of 8%, 6% of the total turnover or any higher sum can be declared as assessee business income.
While calculating deemed income U/S 44AD, you can not claim any expenses as tax deductible U/S 30 to 38. However, applicable deductions U/S 80C to 80U shall be available to the assessee.
Deduction U/S 10A, 10AA, 10B, 10BA, or 80-IA/IAB/IB/IC/ID/IE or 80JJA or 80JJAA or 80LA or 80QQB or 80RRB can not be claimed if Section 44AD benefit for calculating presumptive taxation scheme has availed.
If the assessee declares lower income than the rate of 8% or 6%, as the case maybe, then books of account U/S 44AA has to be maintained and tax audit U/S 44AB has to be carried on.
Restriction on presumptive taxation scheme
If an eligible assessee declares estimated profit as per this section and doesn’t declare profit in accordance to the provisions of this section in any of the 5 consecutive assessment years relevant to the previous year, then the person shall not be eligible to claim this benefit for 5 assessment years subsequent to the assessment year relevant to the previous year in which the profit has not been declared in accordance with the provisions of section 44AD(1).
For example, Mr. A is an eligible assessee offered his income on the basis of section 44AD for assessment year 2018-19. For the assessment year 2020-21, he does not offer his income as per section 44AD. In this case, as he has not offered his income as per the provisions of section 44AD for 5 consecutive assessment years, after assessment year 2018-19, he will not be eligible to avail the benefits of section 44AD for next 5 assessment years from the assessment year 2020-21. This means from assessment years 2021-22 to 2025-26 he is not eligible to avail benefit of Section 44AD.
What are the benefits of presumptive taxation scheme U/s 44AD
An assessee opting for presumptive taxation scheme U/S 44AD is eligible for following benefits;
- Exempted from maintaining books of account for such business as required to be maintained U/S 44AA of the income tax act,1961.
- Whole advance tax can be paid on or before 15th March of the same financial year instead of paying in instalments.
- Tax audit U/S 44AB is not required to be carried on up to the turnover of Rs. 2 Crore. If turnover exceeds Rs. 2 Crore, then section 44AD benefits are not available.