Section 44AD & 44ADA: Presumptive Taxation in 2023

In this article, we are discussing the “Presumptive Tax Scheme” which is a very old Government initiative to reduce the compliance burden of small taxpayers. Two different sections have been framed under the Income Tax Act to provide for the “Presumptive Tax Scheme”:

Section 44ADA: Meant for professionals
Section 44AD: Meant for taxpayers (other than professionals covered u/s 44ADA)

These two sections are quite old sections and the Government has brought amendments in these two sections at frequent intervals to make this scheme more attractive for small taxpayers. This budget i.e. Finance Act 2023 has again brought amendments to the turnover limits prescribed under these sections. That’s why it becomes important to share the amendments with the readers. So, let’s start the discussion over these two sections by covering the recent amendments also.

Presumptive Tax Scheme u/s 44AD

Under Section 44AD, in the case of any eligible assessee who is engaged in an eligible business, an amount equal to 8% of the total turnover or gross receipts or a higher amount as claimed as profit, shall be deemed to be the taxable profits for the purpose of filing of the income tax return.

Therefore, any taxpayer who is eligible u/s 44AD can declare 8% or higher profits on their turnover for taxation purposes. The taxpayer who opts for section 44AD is not required to maintain any books of accounts as required by the law. To boost digital or banking transactions, the Government made a change in section 44AD and prescribed a presumptive rate of 6% in place of 8% which we will discuss below.

Readers would be curious to find answers to their queries relating to section 44AD. Let’s discuss some common questions relating to section 44AD

Who is eligible to opt for the presumptive tax scheme u/s 44AD

An Individual, Hindu Undivided Family (HUF), and Partnership Firm are eligible to opt for section 44AD.
Please note that the taxpayer should be a resident in India to be eligible to opt for the presumptive tax scheme.
A Limited Liability Partnership (LLP) or a Company can not opt for a presumptive tax scheme.
Trusts (AOP/BOI) can not opt for a presumptive tax scheme.

What are the eligible businesses under section 44AD

If you are an eligible assessee according to our previous question and you are engaged in an eligible business, you can opt for a presumptive tax scheme u/s 44AD. According to the section 44AD, the presumptive tax scheme shall not apply to the following businesses:

A person carrying on notified profession (Refer Section 44ADA)
A person earning commission or brokerage income
A person carrying on agency business
A person carrying business of plying, hiring, or leasing goods carriages (Section 44AE)

Therefore, any taxpayer who is carrying on any business other than above, he/she is eligible to take advantage of section 44AD.

What is the rate of presumptive profits under section 44AD

Section 44AD prescribes presumptive profits or gains from the business at the rate of 8% or higher of the total turnover or gross receipts.
However, in case of the total turnover or gross receipts which is received by an account payee cheque or account payee draft or banking channels like NEFT/RTGS/IMPS/UPI, etc., a lower presumptive rate of 6% may also be applied in place of 8%.

What is the turnover limit prescribed under section 44AD

Section 44AD prescribes a turnover limit of INR 2 Crores. It means if the turnover of the eligible business of an eligible assessee is up to INR 2 Crores, he/she can opt for section 44AD. Earlier this limit was INR 1 Crore.
If your total turnover/ gross receipts are more than INR 2 Crore, you are not eligible under section 44AD and you are required to file ITR-3.

Turnover Limit u/s 44AD changed by Finance Act 2023:

To benefit more persons in the small and medium segment, ease of compliance and promote non-cash transactions, Finance Act, 2023 again increased the threshold limits for the presumptive scheme in section 44AD with certain conditions applicable w.e.f. A.Y. 2024-25 and onwards.

Amendment made in Section 44AD by Finance Act, 2023 provides that if you are an eligible assessee carrying on eligible business and where the amount or aggregate amounts received in cash during the year does not exceed 5% of the total turnover or gross receipts, a threshold limit of INR 3 Crores shall apply.

In simple words, if 95% or more of your business turnover is through the banking channel (cheque/RTGS/NEFT/UPI/Card), you can opt for section 44AD up to a turnover of INR 3 crores. Otherwise, the threshold limit of INR 2 crores shall apply.

What are the tax implications of opting for section 44AD

If an assessee is opting for section 44AD, he would not be allowed to make a claim for any expenses or depreciation separately. Any deductions which are allowable under sections 30 to 38 shall be deemed to have been already given full effect and no further deduction shall be allowed under these sections.

Further, in the case of a partnership firm, no separate deduction can be claimed in respect of interest or remuneration to partners.

Author’s Note:

In case the total turnover of the assessee is more than the threshold limit of INR 2 or 3 Crores, the income of the assessee would be computed as per the normal provisions of the Income Tax Act and the assessee would also be required to get his accounts audited under section 44AB.

Presumptive Tax Scheme u/s 44ADA

The benefit of the presumptive taxation scheme was earlier available to traders or manufacturers only. Therefore, to provide relief to small taxpayers who are engaged in the profession, the Government introduced a presumptive taxation scheme for specified professionals through Budget 2016 by inserting section 44ADA. With effect from FY 2016-17, a professional having a gross receipt up to INR 50 Lakhs can avail of the benefit of presumptive taxation under Section 44ADA.

Who can opt for presumptive taxation under section 44ADA of the Income Tax Act

Only Resident Individual or a Partnership Firm who is engaged in a specified profession can opt for a presumptive taxation scheme u/s 44ADA.
Please note that an LLP cannot opt for section 44ADA.

What are the specified professions for the purpose of Section 44ADA

A Resident Taxpayer engaged in any of the following professions can take benefit of the Presumptive Tax Scheme under section 44ADA:

Legal
Medical
Engineering
Architecture
Accountancy
Technical Consultancy
Interior Decoration
Any other specified profession that CBDT notified:

Film Artists- Cameraman, producer, editor, dance director, actor, director, music director, art director, lyricist, story writer, screenplay or dialogue writer, singer, and costume designer.
Authorized Representatives- A person who represents someone before a tribunal or any legal authority in exchange for a fee. It does not include an employee of the person or a person who is carrying on the profession of accountancy.

What is the rate of presumptive tax under section 44ADA

In case you opt for section 44ADA, you are required to declare profits for an amount equal to 50% or more of the gross receipts as profits or gains from the profession.

What is the turnover limit prescribed under section 44ADA

Section 44ADA prescribes a turnover limit of INR 50 Lakhs. It means a Resident individual or partnership firm who carries a specified profession and having gross receipts up to INR 50 Lakhs can avail of the benefit of Section 44ADA. If your gross receipts exceed INR 50 Lakhs, you cannot opt presumptive tax scheme u/s 44ADA.

Turnover Limit u/s 44ADA changed by Finance Act 2023

To benefit more professionals, ease of compliance and promote non-cash transactions, Finance Act, 2023 has increased the threshold limit for the presumptive scheme in section 44ADA with certain conditions applicable w.e.f. A.Y. 2024-25 and onwards.

Amendments made in Section 44ADA by Finance Act, 2023 prescribe a new turnover threshold of INR 75 Lakhs where the amount or aggregate amounts received in cash during the year does not exceed 5% of the gross receipts.

In simple words, if 95% or more of your turnover is through a banking channel (cheque/RTGS/NEFT/UPI/Card), you can opt for section 44ADA up to gross receipts of INR 75 Lakhs. Otherwise, the threshold limit of INR 50 Lakhs shall apply.

What are the tax implications of opting for section 44ADA

If an assessee is opting for section 44ADA, he would not be allowed to make a claim for any expenses or depreciation separately. Any deductions which are allowable under sections 30 to 38 shall be deemed to have been already given full effect and no further deduction shall be allowed under these sections.

Further, in the case of a partnership firm, no separate deduction can be claimed in respect of interest or remuneration to partners.

Other Important Remarks about Presumptive Taxation

Head of Income: Income declared under the presumptive taxation scheme is categorized as a business income and thus shown as “Profits & Gains from Business or Profession” in the ITR.

Tax Rate: Income calculated under the presumptive taxation scheme is taxable as per slab rates applicable to the taxpayer.

Claim for expenses & depreciation: The taxpayer declares his/her income at a fixed percentage under section 44AD/44ADA. Therefore, no separate claim for expenses and depreciation shall be allowed to him.

Deductions under Chapter VIA: The taxpayer declaring income under section 44AD/44ADA can claim the deductions under Chapter VI-A. Please note that the Government allows many deductions to the taxpayers under Chapter VI-A.

ITR Form: Taxpayers opting for presumptive taxation under section 44AD/44ADA shall report such income as PGBP income and file his/her ITR in ITR-4 Form. However, if he/she is also having capital gain income in addition to presumptive income, he/she shall file ITR-3 Form.

Advance Tax Payment: Taxpayers opting for the presumptive taxation scheme under section 44AD/44ADA are required to deposit estimated tax on their income in the form of advance tax on or before 15^th March of the financial year. If the advance tax is not deposited before the due date, interest shall be levied under section 234C. The liability to pay advance tax arises only if the estimated tax liability is more than INR 10,000. The taxpayers not opting for a presumptive tax scheme are required to deposit advance tax in 4 installments.

Disclaimer: The above article is meant only for educational purposes and does not carry any persuasive value. Therefore, the readers are advised to act in consultation with any professional before applying the information contained in this article. Taxwink is not responsible for any loss or damage caused to any person on account of any information contained in this article.

About Author: The article is contributed by CA Naveen Goyal who is a qualified Chartered Accountant with an experience of over 16 years in the field of Direct & Indirect Taxes. He is a prolific writer with a zeal to share knowledge on various issues pertaining to taxation laws in India. He can be reached at: ca.naveen80@gmail.com

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