The presumptive taxation scheme under Section 44AD to provide relief to small taxpayers engaged in any business, except those involved in plying, hiring, and leasing as referred to in Section 44AE. With the budget 2021 update, section 44ADA now applies only to resident individuals, Hindu Undivided Families (HUF), or partnership firms other than LLPs.
Benefit of Presumptive Scheme
- Declare 8% of your turnover (6% incase of digital receipts) as Net income
- Need not to maintain detailed accounting records
- File ITR-4, which is simpler than ITR-3
Eligibility for Presumptive Taxation under Section 44AD
- Individual residents
- Resident partnership firms (excluding LLPs)
- Resident HUFs
these assessees can avail of the presumptive taxation benefits if their annual turnover or gross receipts do not exceed the revised limits in the previous financial year.
Conditions for Section 44AD
A new condition mandates that taxpayers opting for presumptive income must continue for at least 5 years. Key points include:
- Declare Profits for 5 Years: Taxpayers must declare profits as per the presumptive scheme for at least 5 consecutive years.
- Opting Out Consequence: If taxpayers switch to regular business income (ITR-3) within these 5 years, they will lose presumptive benefits and cannot opt for the scheme for the next 5 years.
For example, if Ramu opts for the scheme for AY 2024-2025, he must continue using it for the next five assessment years, i.e., from AY 2024-2025 to AY 2028-2029. If Ramu decides not to use the scheme in AY 2025-2026, he will be ineligible to opt for it again for the next five assessment years, from AY 2025-2026 to AY 2029-2030.
It should be noted that such ineligible period of 5 years starts from the year in which Ramu reports his business income under regular taxes (other than ITR4)
The 5-year restriction also applies if the taxpayer declares profits below 8% or 6%. However, if taxpayers cannot opt for the presumptive scheme due to ineligibility (e.g., turnover exceeds the limit), this restriction does not apply.
The Budget 2023 brought significant amendments to Sections 44AD and 44ADA, revising the Presumptive Taxation Limits for FY 2023-24 (AY 2024-25) as follows:
| Category | Previous Limits | Revised Limits |
|---|---|---|
| Sec 44AD: For small businesses | Rs. 2 crore | Rs. 3 crore* |
| Sec 44ADA: For professionals (doctors, lawyers, engineers, etc.) | Rs. 50 lakh | Rs. 75 lakh* |
*The increased limits are conditional upon 95% of the receipts being through online modes.
Maintenance of Books and Tax Audit
If a taxpayer declares profits below the presumptive scheme threshold and opts out, they must maintain books and possibly undergo a tax audit if their total income exceeds the exemption limit.
Lets say, Mr. Ramu’s turnover in FY 2023-24 is Rs. 2.5 crore, and he opts for the presumptive scheme. In FY 2024-25, his turnover is Rs. 2.7 crore, but he declares profits below 8%. He must use regular computation, maintain books, and undergo a tax audit if his taxable income exceeds the exemption limit.
Tax Audit Liability
Tax audit requirements apply if:
- The turnover exceeds Rs. 1 crore.
- Section 44AD(4) applies, and the total income exceeds the basic exemption limit.
Conclusion
The presumptive taxation scheme under Section 44AD provides significant relief for small taxpayers, but it comes with conditions to ensure consistent compliance. The recent updates in Budget 2023 have expanded the limits, encouraging more businesses and professionals to opt for this scheme, provided they meet the stipulated conditions.
