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Section 44AD – Presumptive basis of calculating business profit

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Section 44AD has been inserted with effect from assessment year 2011-2012 into Income Tax Act . Any one fulfilling conditions that are laid down in section 44AD can calculate their business profit as 8% of the gross receipt or turnover.

Who are eligible to take benefit of Section 44AD

As specified in section 44AD of IT act, following persons will be eligible to calculate their business profit as 8% of their gross receipt or turnover;

  • Individual
  • HUF
  • Partnership Firm (not being a LLP)

For taking benefits u/s 44AD above persons are to be resident in India.

Section 44AD – Presumptive basis of calculating business profit

Which businesses are eligible

Section 44AD has specifically mentioned any business. All types of businesses are eligible to avail this benefit of presumptive taxation.

However following persons are not eligible for section 44AD as it is specifically excluded;

  • A person who is carrying his profession as referred to in section 44AA (1) or
  • A person earning income in the nature of commission or brokerage or
  • A person carrying on any agency business or
  • A person who is in the business of plying, hiring or leasing goods carriages

A person will be eligible for section 44AD only if during the financial year his annual turnover, gross receipt or sales is below Rs. 1 Crore. Budget 2016-17 has proposed to increase the threshold limit of section 44AD from 1 Crore to 2 Crore rupees.

Income tax Audit

Section 44AD – Presumptive basis of calculating business profitIf your turnover or gross receipt or sales crossed the limit of Rs. 1 crore then section 44AD will not be applicable to you and you need to maintain books of accounts as per IT act. You also need to do income tax audit u/s 44AB.

If you want to declare a lower income than the specified limit of 8% then you have to compulsorily get your account audited from a chartered accountant in addition to maintenance of books of accounts under section 44AA.

If you are opting for section 44AD then you need to file your income tax return in ITR-4S-Sugam.

Relevant points to avail the benefit

  • The person taking benefit of this section should not have claimed deduction under section 10A, 10AA, 10B, 10BA, 80HH to 80RRB in the relevant assessment year.
  • The person can claim voluntarily a higher income than the limit of 8%.
  • No deductions will be allowed u/s 30 to 38 of IT act. However remuneration or interest paid to partners in respect of a partnership firm shall be allowed as deduction from income.
  • Any disallowance under section 40, 40A and 43B will be assumed to be claimed while calculating the estimated income @8%.
  • If you are availing benefit of section 44AD then you will be exempted for paying advance tax.
  • Maintenance of books of accounts u/s 44A is not required if you are opting for section 44AD.
  • Section 44AD is not applicable to a private limited and public limited company.
  • Section 44AD is not applicable to a Limited liability Partnership (LLP).
  • Section 44AD will not applicable to a profession.
  • If you have more than one business then you should include all the businesses to calculate the limit of 1 crore. If the turnover crosses that limit then section 44AD will not be applicable and you need to maintain books of accounts and also have to undergo income tax audit.
  • If you are opting for section 44AD then you will be eligible for income tax deduction under chapter VI-A.