Section 44AD of Income Tax Act

  • Author :
  • TATA AIG Team
  • Published on :
  • 02/01/2024

For small businesses and professionals navigating the complexities of Indian tax law, Section 44AD of the Income Tax Act offers a welcome respite. This innovative scheme - presumptive income under Section 44AD - simplifies tax compliance, reduces accounting burdens, and potentially lowers tax liabilities, making it a beacon of relief for those with annual turnovers up to ₹2 crore.

By presuming income based on a percentage of turnover, Section 44AD alleviates the need for extensive bookkeeping and provides a streamlined path to fulfilling tax obligations, allowing these entrepreneurs to focus on what matters most – their business growth.

However, this simplified approach comes with its own set of considerations and limitations, necessitating a closer look to determine if it aligns with your unique financial tapestry.

So, let's get into the intricacies of Section 44AD, exploring its benefits, limitations, and how it can potentially reshape your tax experience.

What is Section 44AD of the Income Tax Act – Let’s Discuss!

44AD of the Income Tax Act offers a presumptive taxation scheme for eligible small businesses and professionals. This scheme allows them to compute their income tax liability based on a presumed percentage of their turnover instead of maintaining detailed books of accounts.

Instead of getting bogged down with maintaining detailed accounts, you can simply report your income based on a fixed percentage of your turnover. Consider it a simplified tax return – just plug in your turnover; your income is presumed!

Presumptive Income Meaning

Income is presumed to be 8% of the turnover if cash transactions exceed ₹10,000 in a day.

For businesses receiving 60% or more of their payments digitally, the presumed income is 6% of the turnover.

Eligibility

Turnover limit: Businesses with a turnover of up to ₹2 crore in the previous financial year can opt for this scheme.

Nature of business: The scheme applies to businesses engaged in trading, manufacturing, mining, agriculture, aquaculture, animal husbandry, professions (except legal and medical), and operating businesses through e-commerce platforms. It excludes businesses like plying, hiring, or leasing of goods carriages.

Taxpayer type: Resident individuals, Hindu Undivided Families (HUFs), and partnership firms (excluding Limited Liability Partnerships) are eligible.

Limitations/Non-eligibility

Limited turnover eligibility: Not applicable to businesses with turnover exceeding ₹2 crore.

Fixed profit percentage: This may not reflect the actual profitability of the business.

Mandatory for five years: Once opted for, the scheme must be adopted for at least five consecutive years.

Benefits

Simplified tax compliance: No need to maintain detailed books of accounts.

Reduced accounting costs: Saves on expenses related to accounting professionals and bookkeeping software.

Lower tax liability: Presumed income may be lower than actual income, leading to potentially lower tax liability.

Key features of Section 44AD in the Income Tax Act

Business Profit Calculation: Business profit is calculated as a minimum of 8% of an individual's total profit or gross receipts.

Reduced Rate for Digital Transactions: The 8% rate is lowered to 6% to incentivize digital transactions, encouraging businesses to adopt digital payment methods such as credit cards, debit cards, account payee cheques or bank drafts, net banking, UPI, RTGS, IMPS, and NEFT.

Actual Profit Declaration: Individuals can declare a return of income exceeding the presumptive income under Section 44AD, providing documentation to support the actual profit claimed.

Advance Tax Payment: Individuals are required to pay advance tax on the entire amount on or before March 15th.

Exemptions for Maintaining Books of Accounts: Section 44AD provides exemptions for individuals who maintain proper books of accounts.

How to Check Tax Liability Under Section 44AD of the Income Tax Act?

In the context of presumptive taxation, the income computation is based on either 8% of turnover for cash receipts or 6% for digital payment receipts.

To understand this concept better, let's consider a practical example:

Suppose Mr Kumar operates a cosmetic store with a turnover of ₹90 lakhs in the previous year. Opting for presumptive taxation under Section 44AD, his income will be calculated at 8% of his turnover, amounting to ₹7.2 lakhs. Consequently, Mr Kumar's annual presumptive tax will be derived from the ₹7.2 lakhs income bracket.

Budget 2023 Update on Section 44AD

The fiscal year 2023-24 (assessment year 2024-25) witnesses amendments to Section 44AD and Section 44ADA in Budget 2023, resulting in revised limits for presumptive income taxation.

Category Limits before the budget Revised limits
Section 44AD: For small businesses ₹2 crores ₹3 crores*
Section 44ADA: For professionals like doctors, lawyers, engineers, etc. ₹50 lakhs ₹75 lakhs*

*The increased limits are contingent upon a requirement that 95% of the receipts must be conducted through online modes.

To Sum it Up

Remember, opting for Section 44AD means you trade the potential for claiming various deductions for the convenience of simpler compliance and potentially lower tax liability due to the presumed income calculation. Carefully evaluate your individual circumstances to decide if this is the right option for you.

It is important to consult with a tax advisor to understand which deductions you can still claim under Section 44AD. They can help you decide whether this scheme is suitable for your business based on your specific expenses and deductions.

Tata AIG’s Health Insurance – An Extra Avenue to Save on Taxes!

Tata AIG's health insurance emerges as an additional avenue for tax savings, offering policyholders financial protection against medical expenses and a strategic approach to optimise their tax liabilities.

By investing in robust health insurance plans, policyholders can potentially enjoy tax benefits on their premium payments. Section 80D of the Income Tax Act allows individuals to claim deductions on health insurance premiums for themselves, their families, and dependent parents, thereby reducing their overall taxable income.

As you seek comprehensive coverage for your health needs, Tata AIG's health policies stand out as a reliable partner, offering not just peace of mind but also a smart approach to managing your financial responsibilities.

Pick the right policy with the help of our online health insurance calculator and safeguard your health the right way.

FAQS

What is the Section 44AD of Income Tax Applicability?

Section 44AD is applicable to individuals, Hindu Undivided Families (HUF), and Partnership Firms. However, Limited Liability Partnership Firms (LLP) are not covered by these provisions.

What is the Tax Audit Criteria for Business and Professionals?

For businessmen, a tax audit under Section 44AB of the Income-tax Act becomes mandatory if their total turnover from business exceeds ₹1 crore. Conversely, professionals are subject to a tax audit if their gross receipts surpass ₹25 lakhs.

How to Go for Income Tax Return Filing under Section 44AD?

Individuals eligible to declare profits on a presumptive basis and who do not maintain books of account under Section 44AD and 44AE can use the simplified Sugam ITR 4S return form. This form can be filed through the income tax e-filing portal, providing a streamlined process for those falling under the presumptive taxation scheme.

Disclaimer / TnC

Your policy is subjected to terms and conditions & inclusions and exclusions mentioned in your policy wording. Please go through the documents carefully.

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