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

Updated on

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.
In an interesting move, a new condition has been added to presumptive income –
You stand to loose presumptive tax benefits, if you do not continue them for at least 5 years.
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. File 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 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 for such business. The government is discouraging taxpayers from misusing the scheme and constantly changing their option often. So if you opt for presumptive continue for 5 years and if you want to opt out, you’ll be barred from resuming presumptive for a period of 5 years. As per the changes in the Budget of 2016, businesses with turnover up to Rs 2 crores can opt for presumptive taxation scheme. Earlier this limit was Rs 1 crore. We’ll quickly list down the features of this scheme-

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

b. Your NET income shall be considered as 8% of your turnover (net income will be considered 6% in case of digital receipts).

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

d. You don’t have to pay advance tax (from FY 16-17, assessee opting for presumptive taxation has to pay 100% advance tax by 15th March of that particular financial year).

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

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

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

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  1. Section 44ada

Frequently Asked Questions

  • What is section 44AD?
    Under Section 44AD of presumptive taxation , small taxpayers with less than 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 benefit 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 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 who have turnover less than Rs 2 crores ( amended to 5 crores subject to minimum criteria of digital transaction in budget 2020). Under the presumptive income scheme, the taxpayer is allowed to presume the minimum profits at 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 export of articles or things)
    • The firm or individuals gross receipts in the previous year should not be more than 2 crore ( or 5 crores subject to minimum criteria of digital transaction 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 presumptive taxation scheme have to declare minimum 8% profits or 6% in 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 turnover 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 presumptive basis and does not maintain books of account u/s 44AD and 44AE. ITR 4 can be filed using Cleartax free e filing portal or income tax efiling 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 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 Rs 5.6 Lakh. Annual presumptive tax will be calculated as per slab on Rs. 5.6 lakh.