Section 44 AD, 44 AE & 44 ADA of Income Tax Act- Presumptive Taxation

Presumptive taxation has come into effect to reduce the compliance burden of small taxpayers. Under the presumptive taxation, small taxpayers neither have to maintain books of accounts nor they require to get them audit.

Sec 44AD.44ADA and 44AE deals with the presumptive taxation under the Income Tax Act 1961.

Section 44AD deals with the business people which says that if aggregate sales in the Financial Year is less than 2 crore then the person is eligible to take its benefit.

Section 44ADA deals with the professionals which says that if the value of services provided is less than 50 lakhs in a Financial Year then the service provider will be eligible to take its benefit.

Section 44AE deals with the transporters which says that if transporter owns less than 10 vehicles during the year then he will be eligible to pay tax under this section.

Earlier only Sec 44AD and 44AE were prevailing which reliefs business class and transporters only. But now, a new Sec 44ADA has been inserted which reliefs service providers also with the harsh compliance of Income Tax Provisions.

Sec 44AD : Presumptive Taxation in case of Business

Presumptive Income –

Sec 44AD deals with the presumptive taxation in case of Business where the income is deemed to be 8% of the total turnover or the declare profit whichever is higher.

A new rule has been inserted in Sec 44AD from the Finance Act 2017 which adds an extra incentive to promote payment digitally.  That new provision says that if the business receives payment digitally, presumed profit on such digital payment would be considered as 6% instead of 8%.

Payments received by any cashless mode such as Cheque/ Demand Draft/ Debit Cards/ Credit Cards/ NEFT/ RTGS etc are treated as Digital Payment which attracts the tax liability at the rate of 6%.

Further, the assessee paying tax under section 44AD won’t be allowed to take the credit of expenses and depreciation. It is deemed to have been allowed while computing the profit with 8% or 6% as the case may be.

All the expenses or deductions given u/s 30 to 38 shall be deemed to have been allowed and no further deduction will be made available.  

Eligibility –

The person whose Gross Turnover in the preceding Financial Year is less than 2 crores would be eligible to pay the tax under Sec 44AD.

Assessee whose Gross Turnover in the preceding Financial Year is more than Rs 2 Crore would be required to comply with the normal tax provisions of the Income Tax Law given u/s 44AB.

Further, this section is applicable only to the Individuals, HUF & Partnership firms (excluding LLP) resident in India.

Further Provisions –

1. Earlier Salary and Interest paid to partners were allowed to get deducted from the profit presumed under section 44AD. But with effect from Finance Act 2016, Salary and Interest paid to partners would also be deemed to have been allowed from the presumptive income.
2. Advance Tax provisions will also be applicable for taxpayers paying tax under Sec 44AD. Although, in order to minimize the compliance procedures Government has provided relief which says that small taxpayers filing a return under Sec 44AD can pay the advance tax 100% up to 15th March of the Financial Year.
3. Assessee earning income through the commission or brokerage are not eligible to take the benefit under Sec 44AD.
4. There are specific sections for Professionals and transporters, hence Sec 44AD will not be applicable on such persons.
5. Limit of Rs 2 crore under Sec 44AD shall be taken before availing deductions under Chapter VI-A.

When can an Assessee Apply for Presumptive Taxation

The assessee who is eligible to avail the benefit of Presumptive taxation under Sec 44AD can opt for such scheme any time. As well as this scheme is not mandatory, if any person wants to opt out of such scheme then he can do so at any time.

But there are certain conditions for opting out of such scheme which says that if any person eligible to opt Sec 44AD and availed its benefit for one or more year and further in any Financial Year opts for Normal taxation then he will be ineligible to opt Sec 44AD for the next 5 years.

If any person opts for the normal scheme, then he will be required to maintain books of accounts and get them audited by a Chartered Accountant.

Assessee filing return under Sec 44AD requires filing their Income Tax Return in ITR Form 4.

SEC 44ADA – Special Provisions for Presumptive Taxation in case of Professionals.

Earlier, the only businessman can avail the benefit of Presumptive Taxation but in order to promote small taxpayers to pay tax who are service providers, Govt. has implemented Sec 44ADA.

Sec 44ADA deals with the professionals and determine the presumptive income at the rate of 50% on the Total Receipts.

Eligibility –

Assessee whose Gross Receipts in a Financial Year is not more than Rs 50 Lakhs can claim the benefit under Sec 44ADA. However, this section has come into effect from Financial Year 2016-17.

This section covers resident Individual, HUF, and Partnership Firm excluding Limited Liability Partnership. Other than these persons could not claim the benefit of Sec 44ADA.

Definition of Profession who can avail the benefit under Section 44ADA –

1. Legal
2. Medical
3. Engineering
4. Architectural Profession
5. Profession of Accountancy
6. Technical Consultancy
7. Interior Decoration

Presumptive Income  –

This provision contains that presumptive income under this section shall be deemed to be 50% of the total gross receipts and all the expenses or deductions covered u/s 30 to 38 shall be deemed to have been allowed. No further deduction of such will be allowed from the presumptive income.

Other Provisions –

1. Under Sec 44ADA, assessee neither requires to maintain books of accounts under Section 44AA nor require to get them audit under Section 44AB.
2. If assessee wants to pay tax less than 50% then he is required to maintain books of accounts u/s 44AA and also get them audit u/s 44AB from a Chartered Accountant.

When Can an Assessee Opt for Sec 44ADA –

The assessee who is eligible for Sec 44ADA can opt for this scheme any time. Even if, assessee wants to opt out of such scheme then he may do so without any restriction.

If assessee wants to claim profit lower than 50% then he may do so by filing return through the normal procedure.