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November 23, 2020

Know Consequences if you opt out of Presumptive Taxation Scheme in Income Tax

by CA Shivam Jaiswal in Income Tax

Know Consequences if you opt out of Presumptive Taxation Scheme in Income Tax

As per the Income-tax Act, a person engaged in business or profession is required to maintain regular books of account and further, he must get his accounts audited. However, to give relief to small taxpayers from the tedious job of maintenance of books of account and from getting the accounts audited, the Income-tax Act has framed the presumptive taxation scheme. Presumptive taxation scheme lets the taxpayers declare their taxable income at a prescribed rate irrespective of actual profit/gains and in turn relieves them from the burden of maintaining regular books of account and getting the same audited.

Presumptive Taxation Scheme under Section 44AD

The presumptive taxation scheme of section 44AD can be adopted by following persons carrying out any business other than business covered under Section 44AE:

  • Resident Individual
  • Resident Hindu Undivided Family
  • Resident Partnership Firm (not Limited Liability Partnership Firm)
  • Any person who has not claimed deductions under section 10A/10AA/10B/10BA or under sections 80HH to 80RRB in the relevant year

In case of a person adopting the provisions of section 44AD, income is computed on presumptive basis at:

  • 6% of total turnover or gross receipts of a tax year received by account payee cheque/bank draft, ECS through bank account on or before due date of filing the return of income
  • 8% of total turnover or gross receipts of a tax year in all other cases

What is the monetary threshold under Section 44AD?

The presumptive taxation scheme of section 44AD can be opted by the eligible persons, if the total turnover or gross receipts from the business does not exceed Rs. 2 crores.

What deductions will not be available if one opts for presumptive taxation under section 44AD?

No other deductions for business expenses which are normally allowed can be claimed for instance depreciation, rent, administrative expenses etc. Written down value of assets can be computed as if depreciation is and has always been claimed

No need to maintain books of account as prescribed under section 44AA if one opts for presumptive taxation under section 44AD?

Section 44AA deals with provisions relating to maintenance of books of account by a person engaged in business/profession.

In case of a person engaged in a business and opting for the presumptive taxation scheme of section 44AD the provisions of section 44AA relating to maintenance of books of account will not apply.

5 Year Block in Period

  • As per Section 44AD, where a taxpayer opts for presumptive taxation scheme for any of the financial year he is required to continue to opt for the same for next 5 years.
  • If he fails to do so, he will not be eligible to opt for presumptive taxation scheme u/s 44AD for 5 years succeeding the year in which he opts out.
  • Further, with respect to those 5 financial years where taxpayer is ineligible to opt for presumptive taxation scheme u/s 44AD, regular books of account need to be maintained and audit shall be conducted if total income exceeds maximum amount not chargeable to tax.
  • For instance, if taxpayer has opted for presumptive taxation under Section 44AD for Year 1 and Year 2 but opts out of it in Year 3, then the taxpayer would not be eligible to opt for presumptive taxation from Year 4 to Year 8.

What are the consequences if a person opts out of presumptive taxation scheme under Section 44AD?

  • If one opts for presumptive scheme, they will have to continue for 5 years and if they want to opt out, they will be barred from resuming presumptive for a period of 5 years.
  • Provisions of section 44AA relating to maintenance of books of account will apply.
  • All other deductions for business expenses can be claimed for instance depreciation, rent, administrative expenses etc.
  • Income shall be computed as per normal income tax provisions. Net income shall not be considered as 8% of turnover (net income will not be considered 6% in case of digital receipts).
  • Taxpayers cannot file ITR-4. ITR-4 Form is the return form for those taxpayers, who have opted for the presumptive income scheme as per Section 44AD, Section 44ADA and Section 44AE and whose income is not more than Rs 50 lakh.

Eligible small businesses or professionals should take advantage of this presumptive scheme as it not only makes taxation easier but also helps reduce the income tax liability. 

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