Section 44AD – Presumptive Taxation for Small Businesses

Introduction to Section 44AD

Section 44AD of the Income Tax Act, 1961, is a beneficial provision designed to simplify tax compliance for small businesses and professionals. It allows eligible taxpayers to declare their income at a prescribed presumptive rate, thereby freeing them from the burden of maintaining detailed books of accounts and undergoing a tax audit.

This scheme aims to promote ease of doing business by reducing the compliance cost and time for eligible small taxpayers.

Eligibility Criteria for Section 44AD

Not all businesses are eligible to opt for the presumptive taxation scheme under Section 44AD. The following conditions must be met:

• Who Can Opt: This scheme is available to a Resident Individual, Hindu Undivided Family (HUF), and a Partnership Firm (excluding a Limited Liability Partnership (LLP)).
• Business Turnover Limit: The total turnover or gross receipts from the business should not exceed ₹2 Crore in the previous year.
• Excluded Businesses/Professions:
  • Persons carrying on a specified profession (covered under Section 44ADA).
  • Persons earning income in the nature of commission or brokerage.
  • Persons carrying on any agency business.
  • Persons carrying on the business of plying, hiring, or leasing goods carriages (covered under Section 44AE).

Presumptive Income Rate under Section 44AD

Under Section 44AD, the law presumes that your income is a certain percentage of your turnover or gross receipts. The prescribed rates are:

• 6% of the total turnover or gross receipts: If the entire amount is received through digital modes (cheque, bank draft, NEFT, RTGS, debit card, credit card, etc.) during the previous year or up to the due date of filing the Income Tax Return.
• 8% of the total turnover or gross receipts: For all other cases, i.e., when receipts are in cash or not through digital modes.

Example 1: A grocery shop has a turnover of ₹1.5 Crore. Out of this, ₹1.2 Crore is received digitally, and ₹0.3 Crore is received in cash.

• Income from digital receipts: ₹1.2 Crore * 6% = ₹7.2 Lakhs
• Income from cash receipts: ₹0.3 Crore * 8% = ₹2.4 Lakhs
• Total Presumptive Income: ₹7.2 Lakhs + ₹2.4 Lakhs = ₹9.6 Lakhs

Benefits of Opting for Section 44AD

Choosing the presumptive taxation scheme under Section 44AD offers significant advantages:

• No Need for Books of Accounts: Taxpayers are not required to maintain detailed books of accounts as per Section 44AA. This substantially reduces compliance efforts.
• Exemption from Tax Audit: If you declare income as per the prescribed rates, you are exempt from getting your accounts audited under Section 44AB.
• Simplified Return Filing: The income tax return form for Section 44AD (ITR-4 Sugam) is simpler.

When Tax Audit Becomes Mandatory Under Section 44AD

Even if you are eligible for Section 44AD, a tax audit becomes mandatory in the following scenarios:

1. Declaring Lower Profits: If you declare profits lower than the prescribed rate (6% or 8%) and your total income exceeds the basic exemption limit.

   Example 2: A business with ₹1.8 Crore turnover (all digital receipts) declares a profit of ₹8 Lakhs (approx. 4.4%). If the individual's total income is, say, ₹9 Lakhs (exceeding basic exemption limit), a tax audit under Section 44AB is mandatory.

2. Opting Out Rule ("5-Year Rule"): If you opt for the presumptive taxation scheme for any five consecutive assessment years and then opt out in any subsequent year, you cannot opt for Section 44AD for the next five assessment years. In such a case, if your total income exceeds the basic exemption limit, a tax audit under Section 44AB is required.

   Example 3: A taxpayer opted for Section 44AD for Assessment Years 2021-22 to 2025-26. In AY 2026-27, they decide not to opt for 44AD, and their turnover is ₹1.2 Crore. In this case, they would be required to get their accounts audited for AY 2026-27, and cannot opt for 44AD again until AY 2031-32.

Filing Income Tax Return under Section 44AD

Taxpayers opting for Section 44AD are required to file their Income Tax Return using ITR-4 (Sugam) Form. This form is designed to be simpler and specifically caters to presumptive income declarations.

The due date for filing ITR-4 for individuals and HUFs is typically July 31st of the assessment year, and for partnership firms, it's October 31st (if a tax audit is required, otherwise July 31st). You can find more details on return due dates.

Other Important Considerations

• Deductions: Under Section 44AD, all business expenses (including depreciation) are deemed to have been allowed. Therefore, no further deduction under Sections 30 to 38 of the Income Tax Act can be claimed. However, deductions under Chapter VI-A (e.g., 80C, 80D) can still be claimed from the presumptive income.
• Advance Tax: Taxpayers opting for Section 44AD are required to pay the entire amount of Advance Tax on or before March 15th of the financial year.
• No Penalty for Non-Compliance with Books/Audit (if compliant with 44AD): If you consistently comply with Section 44AD and declare income at the prescribed rate, you avoid penalties related to the maintenance of books of accounts or failure to get an audit, which are covered under common penalties provisions like Section 271B.