There are presumptive tax provisions in Income Tax Act, which provides the application of flat rates on the total gross receipt of income thereby helping a majority of people from unwanted tax litigations and saving a lot from tax compliance cost. Section 44AD of Income Tax Act 1961 is such section, which specifies applying a fixed rate on business receipts. Let us see how it can help us pay zero tax.
Section 44AD is applicable only to a resident Individual, resident Hindu Undivided Family and resident Partnership (other than Limited Liability partnership, LLP). In other words, this scheme cannot be adopted by an Indian Company, Limited Liability Partnerships(LLP), Non-Resident Individual, Non-Resident Hindu Undivided Family and Non-Resident Partnership. This section is not applicable for assesses who have claimed any income benefit schemes under the Income Tax Act, like under Section 10A, 10AA, 10B, 10BA or under Section 80H to 80RRB.
Section 44AD specifically excluded
A person carrying on profession
Business of plying, hiring or leasing goods carriages referred to in sections 44AE
A person who is carrying on any agency business
A person who is earning income in the nature of commission or brokerage and Any business whose total turnover or gross receipts exceeds two crore rupees (Rs 2 crore).
As per Section 44AA, a person carrying on profession includes carrying on legal, medical, engineering or architectural profession or the profession of accountancy or technical consultancy or interior decoration or any other profession as is notified by the Board in the Official Gazette.
Thus, a normal business person can apply the benefit of this section, for eg Wholesalers, Retailers, small business, restaurant business etc.
Section 44AD says to apply 6% on the gross receipts of business receipt. The applied 6% shall be considered as Income from ‘Profits from Business or Profession’ head. However 6% shall be applied shall be applied only to the receipt received through account payee cheque or draft, or use of electronic clearing system. Any amount received other than the above method, a rate of 8% shall be applied on such receipts.
Let us take an example and see how it work:
If total receipt from Business is Rs 1.5 crores, and let us assume all the receipts are by way of account payee cheque or any electronic method, hence 6% to be applied. Therefore the total income from Business or Profession would be 6% of Rs 1.5 crores, that is Rs 9 lakhs. If there is no other income, like from rental or interest income. The nine lakhs computed above would be the gross total income.
Let us assume that the assesee is an resident individual and has the following deduction available:
1. Interest to Housing Loan Rs 2 lakhs,
2. Principle to Housing Loan Rs 1.5 lakhs,
3. Medical Insurance for Self and parents Rs 50,000.
The total available deductions of Rs 4 lakhs shall be reduced from the gross total income of Rs 9 lakhs computed above. Thereby, the Taxable Income will become Rs 500,000. The tax rate for an individual is 5% up to Rs 5 lakhs from the basic exemption limit of Rs 2.5 lakhs. Therefore the tax would be Rs 12,500. But there is a rebate of Rs 12,500 under section 87A, if the taxable income is less than Rs 5 lakhs, hence applying this rebate the resident individual will be not paying any tax, even though his gross receipt from the business is Rs 1.5 crores. The computation will change is any of the above situation is changed.
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