Save income tax due to demonetisation in India : Guide

Demonetisation creates a lot of the problems in India but there are some good things which increase the digital payments. Now govt of India takes the step to increase the most of digital payments and gives the gift to all Online or offline business or entrepreneurs which received the payments through payment gateways. So in this guide, we are talking about How to save Income tax due to demonetisation in India by adopting digital payments or cashless economy.

Save Income Tax

Govt provide the gifts of the lower rate of income tax on the digital turnover of small business through IT Section under 44AD. On 19th dec govt issued a circular with the subject “Government decides to reduce the existing rate of deemed profit under section 44AD of the Income Tax Act in respect of amounts/receipts through banking channel/digital”.

So Let’s understand the Section 44AD and its benefits for the Online or offline Small business which have less than 2 cr. rupees turnover and receiving online payments through payment gateway or other ways.

What is Section 44AD ?

Section 44AD provides for presumptive tax. Presumptive tax is when the tax payable is fixed at a percentage of total turnover of the business. Under this section, certain assets which carry on business other than agency, transportation, commission and brokerage and have a turnover less than Rs 2 Cr then they will be deemed to earn a profit of 8% of total turnover.  The limit of turnover will increase from Rs 1 Cr to Rs 2 Cr by the budget 2016. It will be applicable from the financial year 2016-2017.

There is also no requirement for the businessman to audit the accounts when he is applying the presumptive tax. The person opting for a presumptive tax can opt out for it. After opting out he cannot avail the scheme benefit of presumptive tax for 5 years preceding.

Amendment in Section 44 AD due to Promoting Digital or Cashless economy.

As the government has banned Rs. 500 and 1000 the economy is moving towards cashless economy by use of paytm or freecharge or cards etc. the government has taken a step as an incentive for small businessman to accept the payments in digital means so it has decreased the presumptive tax percentage from 8% to 6% in respect of the amount of total turnover received through digital means. Although the presumptive tax rate in the case of total turnover received in cash will be 8%. It would be carried on through Finance Bill, 2017.

Applicability of Section 44 AD on Small Business :

  • The Assessee covered is Individual, Partnership, HUF But not LLP.
  • Assessee should be a resident of India.
  • This section only applies to the business and not profession.
  • Their turnover does not exceed Rs. 2 Cr.
  • If this section is made applicable then they cannot claim any deduction under section 10A, 10AA, 10B, 10BA like depreciation or any expenses etc.
  • But the remuneration or interest paid to the partners can be allowed as a deduction from income calculated under it but it will be according to section 40(b).
  • He has to file his ITR under ITR Form 4S- Sugam.

Must Read related to Section 44AD :

Computation of turnover under Section 44AD :

The total turnover will be calculated it will

  • include
    • VAT, Excise Duty Cess and another levy,
    • Sales of unusable empties and supplies and
    • Services charges charged for delivery.
  • But it will not include
    • Advance or deposits received,
    • Consideration which is received on sale of the fixed assets,
    • Cash or other discounts were given.
  • if one or more business is carried on by assesses then total turnover will be of all the business he is carrying on.

How changes affect the Online or offline Business or Entrepreneurs:

The businessman through this change is encouraged to accept the payment in digital forms so that they pay fewer taxes as if they accept the payments in digital payments then the rate for presumptive tax will be 6% and not 8%. Although when he receives payment in cash the rate applicable will be 8%.

If the businessman’s total turnover is 1 Cr. Then if he receives payment in

  • Cash then his presumptive tax rate will be 800,000 and he will have to pay taxes accordingly.
  • Digital then his presumptive tax rate will be 600,000 and he will have to pay taxes accordingly.
  • After the amendment, if he receives payment of Rs 1.5 Cr in digital payment and Rs. 0.5 Cr in cash receipts than his presumptive tax for the digital payment will be 900,000 and for cash will be 400,000 and will pay tax accordingly.

Here is the a better example to understand properly in 3 scenarios :


So hope now you are aware of the saving of income tax through adopting digital economy. if you have any query just mentioned your query in the comments section below or take the help from our legal expert at [email protected]