Section 44AD- An Overview of the Presumptive Taxation Scheme
The Income Tax Act created Section 44AD, a presumptive taxation provision, to lessen the tax burden on small taxpayers or assessees. Those covered by this plan are not obliged to have their books of accounts audited or to retain or show them. Certain individuals and professionals are excused from performing an audit or displaying their books under Section 44AD. Assesses whose vocations are listed in Section 44AA are exempt from this. Apart from the companies mentioned in Section 44AE, the programme aims to provide assistance to small-time assessees who manage any kind of business. In this guide, we will share an overview of the presumptive taxation scheme under this section.
Table of Content
Features of Section 44AD
If the assessee's gross sales are less than Rs 2 crore, the tax due under Section 44AD is computed as 8% of the assessee's gross turnover for the year.
The Income Tax Act's slab rates will apply to income computed in line with this provision.
All other expenses and depreciation would be excluded, excluding interest and payments made to partners, for assesses who take deductions under this clause.
The rules in this section apply to all businesses and professions, with the exception of those specified in Section 44AE.
The assessee need not maintain accounting records or get them audited
If an assessee chooses presumed taxation, they must pay the full amount of advance tax by March 15 of that specific fiscal year. Before FY 2016–17, advance tax payments are not required.
Eligibility for Section 44AD
The presumptive taxation structure provided by Section 44AD is applicable to the following tax assessors:
Resident individual taxpayers
Hindu Undivided Families
Partnership Firms
Further, to apply section 44ad of the Income Tax Act's presumptive income taxes, the organisation's or person's gross receipts or annual turnover from the prior year shouldn't have exceeded Rs. 2 crores.
Revised Taxation Limit for Section 44AD under Budget 2023
The Budget 2023 has set new revised presumptive taxation limits for FY 2023-24 (AY 2024-25) under Section 44AD and Section 44ADA. These are as follows:
Category | Previous limits | New limits |
Sec 44AD: Small businesses | Rs. 2 crore | Rs. 3 crore |
Sec 44ADA: Professionals like doctors, lawyers, engineers, etc. | Rs. 50 lakh | Rs. 75 lakh |
Applicability of Section 44AD
The applicability of Section 44AD is as follows:
All business kinds are subject to the regulations of Section 44AD, with the exception of those that engage in the leasing, plying, or renting of goods. The taxpayer is not eligible for deductions under Section 44AD because these businesses are subject to Section 44AE's restrictions.
Any assessee who wishes to file income tax returns under this provision may do so at the rate of 8% or above. The person would be required to retain the books of accounts and have them audited by a licenced CA if they choose not to file returns under this section and have a turnover of less than 8% of total returns.
Assessees who work in any of the occupations specified in Section 44AA are exempt from Section 44AD. Under this provision, assesses who are employed by the agency or who get compensation through commissions or broker agreements are not qualified to make deduction claims.
Section 44AD allows Indian residents who are individual assessees, Hindu Undivided Families, and partnerships to claim deductions. This clause does not apply to partnerships with limited liability.
Allowance and Disallowances
An assessee will not be permitted to claim deductions under Sections 30 through 38 of the Income Tax Act if their returns are filed under Section 44AD. Depreciation of any kind is included in this.
No disallowance under Sections 40, 40A, or 43B will be permitted if an assessee elects to file their returns under Section 44AD.
Further deductions for any compensation or interest paid to the firm's partners may be made under Section 40(b) if the assessee is a partnership firm and chooses to file its returns under Section 44AD. However, the amount of this deduction is limited to the maximum amount stated in Section 40(b).
Depreciation of Assets
An assessee electing to file tax returns under Section 44AD will not be allowed to deduct any additional costs or depreciation.
Nonetheless, the written down value of any asset employed by a company that meets the requirements of Section 44AD will be determined so that the asset's depreciation can be claimed and allowed in compliance with Section 32.
Advance Tax
An assessee will not be required to pay any kind of tax in advance on the revenue created via the company as indicated in Section 44AD if the assessee decides to file returns or claim deductions under that section.
If the assessee's income is in the form of a commission, however, and the commission earned exceeds the Rs 10,000 taxable limit, the assessee is required to pay advance tax.
Professionals
Professional assessees are eligible to claim deductions and benefits under Section 44AD starting with the 2016–17 fiscal year, as long as their total income for the fiscal year does not exceed Rs 75 lakhs.
Any professional claiming deductions under this section shall be presumed to have taxable income equal to 50% of total revenues for the fiscal year.
Tax Calculation under Section 44AD
If someone complies with Section 44AD, their income will be presumptively calculated as 8% of the gross revenues or turnover of qualified businesses for the fiscal year. The purpose of section 44AD is to encourage small enterprises to adopt digital payment systems and to increase the acceptance of digital transactions. The action took effect in the 2017–18 fiscal year. If a bank draft, account payee cheque or electronic clearing system is received by the account payee, the gross receipt or turnover will be calculated at 6%.
Maintenance of Books and Tax Audits
The taxpayer is required to keep books of accounts if he is unable to choose a presumptive income scheme for the five years, meaning he has not complied with section 44AD(4), and his total income exceeds the level not payable to tax.
Two sorts of cases (for business income other than 44AE, 44BB, and 44BBB) necessitate the liability of a tax audit:
Normal cases (ordinary business income computation) if the taxpayer's total turnover exceeds Rs 1 crore, regardless of the profits percentage.
In the event that both the basic exemption limit and section 44AD(4) are exceeded by the total income.
For individuals, the basic exemption ceiling is Rs 2.5 lakh, but for businesses and organisations, it is zero income.
FAQ
Q1. What is Section 44AD?
Small taxpayers with less than Rs 2 crore in revenue are exempt from maintaining books of accounts under Section 44AD of presumptive taxation, and their earnings are presumed to be 8% of their turnover. Profits credited digitally or through a bank will be regarded at 6%, as opposed to 8% for cash receipts, when claiming benefits under this plan. If a person chooses presumptive taxation, he cannot deduct expenses under sections 30 to 38.
Q2. What is presumptive income under section 44AD?
Section 44AD was created to relieve small taxpayers of the burden of maintaining books of accounts with a turnover of less than Rs 2 crores (amended to 5 crores subject to minimum digital transaction criteria in budget 2020). The presumptive income system allows the taxpayer to assume the minimum profits at the stipulated rate of total turnover while being relieved of the need to have the books of accounts audited.
Q3. From which year is Section 44AD applicable?
The Finance Act of 1994 enacted Sections 44AD and 44AE, which went into force with the 1994-95 assessment year. However, this section has been updated since its debut. Section 44AD was recently modified in the Budget 2020.
Q4. Who can file a return under Section 44AD?
Section 44AD allows for presumptive taxes for individuals, HUFs, and partnership firms who have not claimed exclusions under sections 10A/ 10AA/ 10B/ 10BA (profit deductions from exports). The firm's or individual's gross receipts in the preceding year should not be more than Rs 2 crore (or Rs 5 crore subject to the minimum digital transaction threshold of more than 95% of total receipts and payments in Budget 2020). Individuals or businesses that operate or hire freight carriages are not permitted to adopt these provisions. The organisation or individual opting for a presumptive taxation plan should declare a minimum of 8% profits (or 6% in the case of digital revenues).
Q5. How can you file an IT return under Section 44AD?
The Sugam ITR 4S is a simplified return form that can be utilised by an assessee who is eligible to declare earnings on a presumptive basis and does not keep books of account under sections 44AD and 44AE.
Q6. How is tax calculated under section 44AD?
Section 44AD is a presumptive taxation scheme in which income is estimated at 8% of turnover (6% in the case of digital receipts and payments) and the taxpayer is exempt from keeping accounting records.
Q7. What is the Section 44AD limit for AY 2023-24?
Individuals, HUFs, or partnership firms with a turnover of less than Rs.2 crore are eligible for presumptive income under Section 44AD.
Q8. What happens when the assessee conducts multiple businesses?
If an assessee is conducting more than one business or running numerous enterprises, the accumulated turnover that all the businesses yield during the course of the financial years shall be considered when claiming deductions under Section 44AD of the IT Act.
Q9. What happens when the assessee conducts a business and a profession simultaneously?
If an assessee is determined to be receiving income from both a business and a profession at the same time, only the revenue earned from the operation of the business is eligible for deduction under Section 44AD. Any income earned by the assessee from his or her occupation would be estimated according to the standard guidelines of the Income Tax Act.
