Section 44AD allows businesses, entrepreneurs, and professionals to pay taxes on the basis of “presumed profits”. The best thing about section 44AD is that the assessee falling under this section doesn’t need to maintain records of transactions and accounts.

It is applicable for businesses such as services, trading, and manufacturing. Plying, hiring of vehicles, leasing of goods carriages (i.e. businesses related to transportation), agency, brokerage, etc. are not included. However, the services and businesses allowed under this scheme have a turnover less than Rs. 2 crores in a year.

As per the previous Income Tax laws, professionals and businesses were supposed to maintain books for taxation purposes. Later the Government decided to use a percentage of turnover as the presumed income and tax them accordingly in order to provide relief to small businesses and professionals who found it challenging to maintain a record of transactions. Under this section, a turnover of more than 8% will be considered income or profit of a person.

How is taxable income calculated?

Taxable income is computed in different ways for businesses and professionals.

For businesses: Eight percent of the revenue from businesses is taken as the net income, which has to be shown for filing taxes. The taxpayer can show more profit if the margin is higher. Tax is calculated on the income shown by the taxpayer.

Businesses under 44AD would not face any further deductions on 8% of the turnover in the form of expenses, etc. The figure 8% is deemed to be net of all expenses upon which income tax must be paid.

However, 8% is not to be mandatorily assumed as the net income. If a taxpayer’s business profitability is less than 8%, he or she can file taxes in regular ways. The tax rate would be decided as per the current tax rules.

If the turnover of a company is more than Rs. 2 crores, the net income is calculated by subtracting expenses and depreciation from revenue.

For professionals: Presumptive taxation was available only to certain types of businesses earlier, but now professionals have been included. Professionals with a turnover less than Rs. 50 lakh come under Section 44ADA. About 50% of the turnover of professionals is considered to be net income and taxed. Eligible professions include legal, medical, engineering, architecture, accountancy, technical consulting, etc. Once a professional opts for 44ADA, he or she cannot claim any other expenses from the 50% net income defined under this scheme.

In order to enjoy benefits of section 44AD, one must continue filing presumptive scheme for five years. However, this condition applies only to businesses. These five years are counted in sequence, i.e., without any discontinuity. Any break to normal taxation will deprive you of the benefits of presumptive taxation.