Section 44AD – Presumptive Scheme to be opted for atleast 5 years

The government has introduced the presumptive taxation scheme under section 44AD to give relief to small taxpayers. Taxpayers engaged in any business other than plying, hiring and leasing referred to in section 44AE of the Act. Budget 2021 update: Section 44ADA applied to all the assessees being residents in India. Now onwards, it applies only to the resident individual, Hindu Undivided Family (HUF) or a partnership firm, other than LLP.

Budget 2023 Update

The Budget 2023 amended Sec 44AD and Sec 44ADA and revised presumptive taxation limits for FY 2023-24 (AY 2024-25) as follows:

*The increase in limits is subject to a condition that 95% of the receipts must be through online modes.

Conditions for Section 44AD

In an interesting move, a new condition was  taxpayers opting for presumptive income, i.e. –

You stand to lose presumptive tax benefits, if you do not continue them for at least 5 years.

Details of the additional condition

This additional condition has been added by substituting sub-section (4) of 44AD which is – If you are opting for the presumptive scheme, you must-

a. Declare your profits as per the presumptive scheme for at least 5 years in continuation.

b. If you decide to show and file profits as per regular business (ITR-3) before the end of these 5 years, you will lose presumptive benefits and be disallowed from presumptive taxation for the subsequent 5 years.

Please note that 5 years shall be counted starting the year in which you first file usual taxes (ITR-3) for such business. The government is discouraging the taxpayers who misuse the scheme and constantly change their options often. 

So if you opt for a presumptive scheme, continue for 5 years and if you want to opt-out, you’ll be barred from resuming with the presumptive scheme for a period of 5 years. As per the changes in the Budget of 2016, businesses with turnover up to Rs 2 crore can opt for a presumptive taxation scheme. Earlier this limit was Rs 1 crore. 
Features of the presumptive scheme –

a. Your turnover must be less than Rs 2 crore.

b. Your minimum net income should be 8% of your turnover (the minimum net income should be considered 6% in the case of digital receipts).

c. You don’t have to maintain accounting records.

d. Assessee opting for presumptive taxation has to pay 100% advance tax by 15th March of that particular financial year Prior to FY 2016-17 you don’t have to pay advance tax.

e. You don’t have to get your accounting records audited.

f. You can file your tax return in ITR-4 in a much shorter and simpler form than ITR-3.

Professionals have also been added to the ambit of presumptive taxation – read here in detail. However, the time limit of 5 years condition applies only to businesses.

New condition (Section 44AD(4) analysis)

The restrictions that the taxpayer couldn’t opt for the presumptive income scheme for five years will be applicable only when he declares the profits lower than 8% or 6%. If, because of any other reasons, he cannot opt for a presumptive income scheme, then restrictions of Section 44AD(4) do not apply.

Let us understand the condition with an illustration:

In FY 2018-19, the turnover of Mr H was Rs 1.5 crore. He declares his income Rs 12 lakh and opts for a presumptive income scheme under section 44AD. The turnover of Mr H for FY 2019-20 is Rs 2.1 crore, and for FY 2020-21 is Rs 1.9 crore. Is it possible to opt for section 44AD in FY 2020-21? 

Section 44AD(4) will attract the year when the assessee declares the profits less than 8% or 6%. The taxpayer will not be eligible to opt for a presumptive income scheme for the next five years. 

However, section 44AD(4) will not apply when the taxpayer cannot opt for the presumptive schemes due to non-eligibility. For example, gross turnover exceeding the presumptive scheme limit (i.e. Rs 2 crore), the taxpayer’s business does not qualify for a presumptive scheme, etc. In such conditions, even if Mr H declares income as per normal provisions (not presumptive scheme) in the FY 2019-20, he can opt for the presumptive scheme in the FY 2020-21. However, he must declare profits of more than 8% or 6% for the FY 2019-20 in regular income computation

Maintenance of books of accounts and tax audit

If the taxpayer cannot opt for a presumptive income scheme for the five years, i.e. he has not complied with section 44AD(4), and his total income exceeds the amount not chargeable to tax, he is liable to maintain books of accounts.

For better understanding, let us take the example of Mr P. 

Mr P runs a sole proprietorship firm, and his gross turnover is Rs 1.5 crore during the FY 2019-20. He opts for presumptive income first time during the FY 2019-20 by declaring profits above 8 per cent. In FY 2020-21, his turnover is Rs 1.7 crore, but he decides to declare profits below 8 per cent and compute income as per regular provisions of business (i.e. claiming all the expenditures). After computation, his taxable income is Rs 8 lakhs, i.e. above the basic exemption limit. Is he liable to maintain books of accounts and tax audits?

Since Mr. P declares income less than that defined in the presumptive income scheme during the FY 2020-21, he opts to report his income as per regular computation. Hence, he is not eligible to opt for a presumptive scheme for five years. In any of these five years, if his taxable income exceeds the basic exemption limit, he is liable to maintain books of accounts and do a tax audit for the relevant financial year.

Hence, during the financial year 2020-21, he did not comply with section 44AD(4), and his taxable income is above the basic exemption limit. He must maintain books of accounts of his business and will be liable for a tax audit.

Note: 

• The liability of tax audit is required in two types of cases (for business income other than 44AE,44BB and 44BBB)-
  • In normal cases (regular business income computation), if the total turnover of the taxpayer exceeds Rs 1 crore, irrespective of profits percentage.
  • When section 44AD(4) applies, and in addition, the total income exceeds the basic exemption limit.
• The basic exemption limit for individuals is Rs 2.5 lakh, whereas it is nil income for firms and companies.

Frequently Asked Questions

What is section 44AD?

Under Section 44AD of presumptive taxation, small taxpayers with less than Rs 2 crore of turnover are not required to maintain books of accounts and their profits are presumed to be 8% of their turnover. For availing benefits under this scheme, profits, where income is credited digitally or through the bank, will be considered as 6% as against 8% for cash receipts. If a taxpayer opts for presumptive taxation, he will not be allowed a deduction for expenses u/s 30 to 38.

Section 44AD is applicable from which year?

Sections 44AD and 44AE were introduced by the Finance Act, 1994 with effect from Assessment Year 1994-95. However, since introduction, there have been updates in this section. Recently section 44AD has also been updated in Budget 2020

What is presumptive income under section 44AD?

Section 44AD was introduced to give relief to the small taxpayers from maintaining books of accounts that have a turnover of less than Rs 2 crores (amended to 5 crores subject to minimum criteria of digital transactions in budget 2020). Under the presumptive income scheme, the taxpayer is allowed to presume the minimum profits at the prescribed rate of the total turnover and is relieved to get the books of accounts audited.

Who can file return under section 44AD?

Section 44AD of presumptive taxation can be opted for below mentioned assessees

Resident individuals, HUFs and Partnership firms who have not claimed exemptions under section 10A/ 10AA / 10B/ 10BA (deductions of profits derived from the export of articles or things)

The firm or individuals gross receipts in the previous year should not be more than Rs 2 crore (or Rs 5 crore subject to minimum criteria of digital transactions of more than 95% of total receipts and payments in Budget 2020)

Individuals or firms engaged in the business of plying/hiring goods carriages cannot adopt these provisions.

Provided the firm or individual opting for a presumptive taxation scheme has to declare a minimum of 8% profits or 6% in the case of digital receipts).

What is turnover under section 44AD?

Individuals, HUFs or partnership firms to be eligible for opting for presumptive income u/s 44AD should not have a turnover of more than Rs 2 crore.

How to file an income tax return under section 44AD?

The Sugam ITR 4S is a simplified return form to be used by an assessee if he is eligible to declare profits on a presumptive basis and does not maintain books of account u/s 44AD and 44AE. ITR 4 can be filed using Cleartax e-filing portal or income tax e-filing portal.

How to calculate tax under section 44AD?

Section 44AD is a presumptive taxation scheme, income will be calculated on the basis of 8% of the turnover( 6% in case of digital receipts and payments) and the taxpayer has a relief for not maintaining the books of account. For example, Mr Uday is having a bookshop with a turnover of Rs 70 lakh for the previous year. He wishes to opt for presumptive taxation under 44AD, under this section his income will be computed at 8% of the turnover of Rs 5.6 lakh. Annual presumptive tax will be calculated as per slab on Rs.5.6 lakh. 

What happens if assessee is running multiple businesses?

The total accumulated turnover that all the businesses earn during the course of the financial years shall be taken into consideration when claiming deductions under Section 44AD. 

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