Section 44AD & 44ADA: The Impact of Presumptive Taxation on Your Advance Tax Payments

Section 44AD & 44ADA: The Impact of Presumptive Taxation on Your Advance Tax Payments

The Income Tax Act of India presents several schemes aimed at easing compliance for taxpayers. Among these are the presumptive taxation schemes outlined in Sections 44AD and 44ADA, primarily tailored for small businesses and professionals. These schemes permit qualifying taxpayers to report their income at a specified rate, alleviating the need for meticulous bookkeeping and audits.

In addition to annual tax submissions, numerous taxpayers are also obligated to remit Advance Tax during the financial year. A frequent query arises: How does choosing a presumptive taxation scheme under Section 44AD or 44ADA influence the computation and schedule of Advance Tax payments?

This article explores the details of Sections 44AD and 44ADA, provides an overview of the general principles of Advance Tax, and importantly, elucidates the unique provisions connecting these presumptive schemes to your Advance Tax responsibilities, emphasizing a notable ease of compliance.

Presumptive taxation schemes enable taxpayers to estimate their income, considering a defined percentage of their turnover or gross receipts as profit. This significantly streamlines compliance.

Eligibility: This applies to resident individuals, Hindu Undivided Families (HUFs), and partnership firms (excluding LLPs) involved in qualified businesses. It does not include businesses engaged in the plying, hiring, or leasing of goods carriages (which fall under Sec 44AE), agency businesses, or those earning commission or brokerage income. Certain professions mentioned in Sec 44AA(1) are also excluded (and covered under 44ADA).

Turnover Limit: The total turnover or gross receipts for the financial year must not exceed ₹2 Crore. (Note: This limit increases to ₹3 Crore if the cash receipts during the year are no more than 5% of the total turnover or gross receipts.)

Presumed Income: The presumed income is at least:

• 8% of the total turnover or gross receipts.
• 6% regarding the amount of turnover or gross receipts received through account payee cheques, bank drafts, ECS, or other specified electronic methods during the financial year.

Benefits: There is no obligatory requirement to keep detailed books of account under Section 44AA or to get them audited under Section 44AB for the income reported under this scheme.

Eligibility: This is applicable to resident individuals or partnership firms (excluding LLPs) engaged in professions delineated in Section 44AA(1) (such as legal, medical, engineering, architectural, accountancy, technical consultancy, interior decoration, etc.) or other designated professions.

Gross Receipts Limit: The total gross receipts for the financial year should not surpass ₹50 Lakh. (Note: This limit is raised to ₹75 Lakh if the cash receipts during the year do not exceed 5% of the entire gross receipts.)

Presumed Income: The presumed income is at least 50% of the total gross receipts generated from the profession.

Benefits: Like Section 44AD, there is relief from the necessity of maintaining detailed records (Sec 44AA) and audits (Sec 44AB) concerning the income declared under this scheme.

Note: Taxpayers have the option to voluntarily report income exceeding the presumed rates under both sections.

Advance Tax entails paying your income tax liabilities in portions throughout the financial year instead of as a single payment at its conclusion. It adheres to the concept of "pay as you earn."

Applicability: Any taxpayer (individual, firm, company, etc.) whose predicted tax obligation for the financial year is ₹10,000 or more is mandated to pay Advance Tax.

Standard Due Dates: For the majority of taxpayers (with the exception of those under Sec 44AD/44ADA), Advance Tax is generally payable in four installments:

• 15% by June 15th
• 45% by September 15th
• 75% by December 15th
• 100% by March 15th

Herein lies a notable simplification for taxpayers selecting presumptive taxation under Sections 44AD or 44ADA:

Special Provision: Taxpayers electing to report their income under the presumptive taxation schemes of Section 44AD or Section 44ADA are not obliged to pay advance tax through quarterly installments.

Instead, they must remit the full estimated Advance Tax liability as a single payment by the 15th of March in the financial year.

Reason for This Relaxation: This rule takes into account the challenges small businesses and professionals may encounter when estimating their income and paying taxes quarterly. It enables them to concentrate their entire Advance Tax payment at the end of the financial year.

Despite the streamlined payment schedule, Advance Tax is still necessary if the estimated total tax liability is ₹10,000 or greater. The computation includes:

1. Estimating the overall turnover/gross receipts for the financial year.
2. Calculating the presumed profit using the applicable rate (8%/6% for 44AD, 50% for 44ADA) or a higher percentage if opting to declare additional income.
3. Calculating the total income tax on this presumed profit (after taking into account deductions permitted under Chapter VI-A, if any) based on the relevant income tax slab rates for the financial year.
4. Deducting any Tax Deducted at Source (TDS), if applicable.
5. If the resulting tax liability reaches ₹10,000 or more, this amount must be paid as Advance Tax by March 15th.

Failing to remit the required Advance Tax by the deadline (March 15th for 44AD/44ADA participants) incurs interest:

• Interest under Section 234B: Imposed if the total Advance Tax paid is below 90% of the assessed tax or if no advance tax has been paid. Interest is charged at 1% per month or any part thereof from April 1st of the assessment year until the total income is determined/amount is paid.
• Interest under Section 234C: Imposed for postponement of installments. For taxpayers under 44AD/44ADA, this interest specifically applies if they do not pay the entire advance tax amount by March 15th. They are exempt from interest under 234C for deferring the June, September, and December installments, provided they pay the complete tax by March 15th.

If a taxpayer eligible for Section 44AD or 44ADA opts to report profits lower than the established presumptive rates (8%/6% or 50%) and their total income surpasses the basic exemption limit:

1. They forfeit the advantages of the presumptive scheme for that assessment year.
2. They are required to keep books of account as specified under Section 44AA.
3. They must have their accounts audited according to Section 44AB.
4. Importantly, they lose the exemption for Advance Tax payment and must remit Advance Tax in the standard four quarterly installments (June 15, September 15, December 15, March 15).
5. For Section 44AD, if a taxpayer withdraws from the presumptive scheme after benefiting from it, they may be prohibited from rejoining for the subsequent five assessment years.

Choosing presumptive taxation as per Section 44AD or 44ADA provides considerable ease by eliminating the need for detailed record-keeping and audits for qualifying small businesses and professionals. An important associated advantage is the simplification of Advance Tax obligations. Rather than making quarterly payments, qualifying taxpayers are only required to settle their total Advance Tax liability (if it exceeds ₹10,000) in a single payment by March 15th of the financial year.

Grasping this specific regulation is essential for effectively managing cash flow and preventing interest penalties. Always verify that you fulfill the eligibility requirements for the presumptive schemes and ensure timely payment of your obligations. If you have any uncertainties, it's advisable to seek guidance from a tax professional.

Leave a reply