Taxation for Presumptive Income Under Section 44AD
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Income tax return filing is one of the important business compliance that every businessman is expected to perform. Business owners are expected to file their income tax return on yearly basis. A business tax filing typically involves drafting of yearly profit and loss statement (PnL) and a Balance Sheet as on the closing date of the Financial Year.
While large business entreprises can easily maintain these records with the amount of resources available both human and financial, small business owners often find it difficult to maintain detailed records for their business. To ease the compliance burden from individual business tax filers, section 44AD was introduced in 1994. Year on year changes are introduced in Section 44AD to bring more ease to business owners in their income tax filing and make tax returns hassle free.
What is Section 44AD of Income Tax?
As per the rules laid down in Section 44AD of income tax, a business owner is not required to maintain detailed books of accounts if her/his turnover is less than INR 2 crores. As per the rules of this section, a taxpayer can declare profit at the rate 8% of their turnover and need not maintain complete books of accounts. Furthermore, if the revenue is received through crossed cheques, bank drafts (DD), credit cards, debit cards or through electronic means like net banking (RTGS, IMPS, NEFT), or even UPI or BHIM Aadhar Pay, the business owner can declare a profit to the tune of 6% of their turnover.
While a taxpayer’s actual profit could be more than 8%, however the maximum amount of profit will be limited at 8% as per Section 44AD.
Frequently Asked Questions (FAQs)
Q1. Who can apply for this 44AD?
Any entrepreneur, partner of a firm but not LLP or anyone who is a part of his own Hindu undivided family business who doesn’t receive any brokerage or commission.
Q2. Can I have other types of income apart from business income?
Yes. All types of income are allowed under this scheme. Just remember the criteria of 6% or 8% apply to your business income only.
Q3. Which ITR Form I have to file?
Taxpayer is required to file ITR-4 for income under Section 44AD.
Q4. Can I claim deductions?
Yes one can claim deductions like LIC, Mediclaim, Investments made in PPF, NSC, etc. which are allowed normally. Only the business expenses are not allowed.
Q5. For what type of business is it allowed?
Income from all types of businesses can be claimed under 44AD expect business income from agency business and businesses like plying, hiring, or leasing goods carriages.
Q6. I am a professional, can I apply?
No, this scheme is for businessmen only. For income of professionals, you can refer to Section 44ADA.
Q7. Even depreciation is not allowed?
Yes, depreciation is not allowed. But the value of asset can be shown as if depreciation was applied as per Income tax depreciation rates allowed.
E.g. Plant & Machinery cost = Rs. 2 Lakhs
Written down Value = Rs. 2 Lakhs – (15% of Rs. 2 Lakhs) = Rs. 1,70,000
You can show Plant & Machinery at Rs. 1,70,000 in the Balance Sheet.
Q8. Can I go for 44AD scheme this year, and opt out next year?
No, the only disadvantage of 44AD is that you have to show your profit more than 8% or 6%, whichever applicable for 5 continuous years. E.g. If you opt for 44 AD in year 2019-20, you have to continue showing under 44AD scheme for years 2020-21, 2022-23, 2023-24 and 2024-25. (Total 5 years)
Q9. What if I show my profit less than 8% or 6% in these 5 years?
Every year from the year in which you want to show your profit less than 8% or 6%, you will have to maintain books of accounts and get your books audited by a practicing Chartered Accountant.