Demystifying Section 44AD: A Guide to Presumptive Taxation

Section 44AD is a presumptive taxation scheme that was introduced by the Income Tax Act, 1961 in order to ease the tax burden on small taxpayers or assessee. Section 44AD provides a way to calculate tax on gross receipts. Tax under Section 44AD is calculated at 8%/6% of the gross turnover of the assessee for the year under consideration, provided that his or her gross sales are less than Rs 2 crore. Income earned during the year under this provision is liable to taxation in accordance with the Income Tax Act’s slab rates.
The specified limit for opting for presumptive taxation under the provisions of Section 44AD:-
Category Previous Limits Revised Limits
Small Business Rs.2crorers Rs.3crorers

1. What is Presumptive Income under section 44AD?

Section 44AD was introduced to provide 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.

2. Who are eligible for Section 44AD?

The following tax persons are eligible to opt for the provisions of Section 44AD’s presumptive taxation scheme:
  • Resident Individual taxpayers
  • Partnership Firm
  • Hindu Undivided Families (HUFs)

3. Who cannot opt for Section 44AD?

  • A Local Authority
  • Non-Resident
  • HUFs who is not resident
  • A Co-operative-Society
  • Limited Liability Partnership (LLP) both resident and non-resident
  • Association of person
  • Every Artificial Juridical Person ‘
  • Companies both Domestic as well as Foreign Companies

4. 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 crores. From FY 2023-24, the limit has been revised to Rs 3 crores.

5. 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 X 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. If all the transactions have been made by digital mode then, his income will be computed at 6% which will amount of 4.2 lakhs. Accordingly, the tax will be calculated as per the slab rates.

6. How to file an Income Tax Return under section 44AD?

Form ITR 4 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 filled on the income tax e-filing portal. Taxcellent guides you in calculating tax liability as per section 44AD of the Income Tax Act and also assists you in Income Tax Return Filing Services by using Form ITR-4. Taxcellent guides you in proper tax planning as well as tax savings.

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