Exploring the Benefits and Challenges of Section 44AD Presumptive Taxation

From Complexity to Clarity: Mastering Section 44AD Presumptive Taxation

Introduction:

In India, tax regulations can often seem complex and overwhelming, especially for small business owners. However, certain provisions within the Income Tax Act aim to simplify tax compliance for these entities. One such provision is Section 44AD, which offers a presumptive taxation scheme. In this blog post, we'll delve into the intricacies of Section 44AD, exploring its provisions, benefits, and implications for taxpayers.

Understanding Section 44AD:

Section 44AD of the Income Tax Act, 1961, provides a presumptive taxation scheme for eligible taxpayers engaged in certain business activities. Under this section, taxpayers can declare their income at a prescribed rate, thereby simplifying the process of computing taxable income. This scheme is primarily targeted at small businesses with turnover below a specified threshold.

Who is an Eligible Assessee?

1.Resident Individual

2.Resident Hindu Undivided Family

3.Resident Partnership Firm (With the exclusion of Limited Liability Partnership Firm as defined under LLP Act,2008)

4.All types of businesses other than hiring, plying carriages, income received as brokerage or commission eligible under Section 44AD.

5.The assessee has not claimed any deduction under Sec. 10A, 10AA, 10B, 10BA, 80HH to 80RRB in the relevant assessment year.

The presumptive taxation scheme of section 44AD can be exercised only if your total turnover or gross receipts from the business do not exceed Rs. 3 crores for AY- 2024-2025 onwards

Presumptive Taxation Rate:

Under Section 44AD, eligible taxpayers can declare their income at a prescribed rate, which is deemed to be 8% of the total turnover or gross receipts of the business (6% in case of turnover or gross receipts realized digitally/through banking channels on or before the due date for filing ITR u/s 139(1) on account of such eligible business.). This rate is applied irrespective of the actual profit or loss incurred by the taxpayer during the financial year. However, it's important to note that taxpayers availing of this scheme are not required to maintain detailed books of accounts.

Opting in or out of Section 44AD for Businesses

Any person who is eligible to avail the benefit of Section 44AD as per the eligibility mentioned above can at any time opt for the scheme of Presumptive Taxation.

Moreover, a person can also opt out of this at any time. However, as per the latest amended laws – if a person opts out of the scheme of Presumptive Taxation of Section 44AD, then he cannot avail the benefit of the scheme of Presumptive Taxation for the next 5 years.

The same can be summarized in the below table:

Particulars	Presumptive Taxation under Section 44AD for Business
AY 2017-18, 2018-19, AY 2019-20	Opts for Presumptive Taxation
AY 2020-21	Does not opt for Presumptive Taxation
AY 2021-22 to AY 2025-26	Cannot opt for Presumptive Taxation

In case a person opts out of the provisions of Section 44AD – he would also be required to get his accounts audited under Section 44AB by a Chartered Accountant.

Examples

Let us consider the following particulars relating to a resident individual, Mr A, being an eligible assessee carrying on retail trade business whose total turnover do not exceed 3 crores in any of the previous year relevant to AY.2024-25 to A. Y.2026-27

Particulars	A.Y. 2024-25	A.Y. 2025-26	A.Y. 2026-27
Total turnover	2,80,00,000	2,90,00,000	3,00,00,000
Amount received through prescribed electronic modes	2,60,00,000	2,45,00,000	2,80,00,000
Income offered for taxation	17,20,000	18,30,000	15,00,000
% of gross receipts	6% on 2.60 Cr and 8% on 20 Lakh	6% on 2.45 Cr and 8% on 45 Lakh	5% on 3 Cr
Offered income as per presumptive taxation scheme u/s 44AD	Yes	Yes	No

In the above case, Mr. A, an eligible assessee, opts for presumptive taxation under section 44AD for A.Y 2024-25 and A.Y.2025-26 and offers income of 17.20 lakh and 18.30 lakh on gross receipts of 2.80 crore and 2.90 crore, respectively.

However, for AY-2026-27, he Offers income of only 15 lakh on turnover Of 3 crore, which amounts to 5% of his gross receipts. He maintains books of account under section 44AA and gets the same audited under section 44AB. Since he has not offered income in accordance with the provisions of section 44AD for five consecutive assessment years, after A Y.2024-25, he will not be eligible to claim the benefit of section 44AD for next five assessment years succeeding A Y-2026-27 i.e from AY.2027-28 to 2031-32.

Conclusion:

Section 44AD offers significant benefits for eligible taxpayers, simplifying tax compliance and reducing administrative burdens. However, careful consideration is essential, especially regarding eligibility criteria, presumptive taxation rates, and the implications of opting in or out. By understanding the nuances of Section 44AD, small businesses can navigate tax obligations effectively and focus on growth and development.

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