How to avail benefit of Section 44AD of I.T.Act : A compressive guide by udaipur Chartered Accountant’s .


Presumptive Taxation Scheme under Section 44AD of the Income Tax Act. A compressive guide by udaipur Chartered Accountant’s explains eligibility, key amendments, and the simplified taxation process for small businesses in India.

Introduction:

In the complex landscape of Indian taxation, small businesses often find it cumbersome to maintain comprehensive records, manage audits, and comply with tax regulations. The Indian government, in its continuous efforts to support small taxpayers and reduce their compliance burden, introduced Section 44AD of the Income Tax Act, which offers a simplified method of taxation known as the Presumptive Taxation Scheme. This scheme allows businesses to calculate their taxable income at a fixed percentage of their turnover, thereby eliminating the need for regular bookkeeping and audits.

Section 44AD is a boon for small business owners who fall under the prescribed turnover limit. This scheme offers substantial relief by reducing administrative costs and simplifying tax procedures. In this blog, we will explore the provisions of Section 44AD in detail, its eligibility criteria, recent amendments, and how businesses can benefit from this scheme.

What is Section 44AD?

Section 44AD of the Income Tax Act, 1961, provides a presumptive taxation scheme for small businesses in India. Under this section, taxpayers are allowed to declare a fixed percentage of their total turnover or gross receipts as their taxable income. This percentage ranges between 6% to 8% depending on the nature of the business. The beauty of this scheme is that it offers a straightforward method to calculate income, removing the need for detailed financial statements or an audit.

Key Provisions of Section 44AD:

  1. Taxable Income Calculation
    The taxable income under Section 44AD is presumed to be 6% of the total turnover or gross receipts for businesses that receive payments by digital means or 8% for businesses that deal primarily in cash transactions. This simplifies the process, as the business need not maintain complex books of accounts or get their accounts audited.
  2. No Need for Books of Accounts
    One of the significant advantages of Section 44AD is that businesses availing of this scheme are not required to maintain detailed books of accounts. Under the scheme, businesses are presumed to have made a profit equivalent to the fixed percentage of their turnover.
  3. Eligibility for the Scheme
    The eligibility criteria for the scheme are simple and designed to benefit small businesses. The following taxpayers can opt for the presumptive taxation scheme under Section 44AD:
    • Individual taxpayers
    • Hindu Undivided Families (HUFs)
    • Resident partnership firms (excluding LLPs)
  4. Exclusions from Total Turnover
    Certain receipts do not form part of the total turnover of an assessee under Section 44AD. These include:
    • Advances or deposits
    • Commissions earned from the sale of fixed assets
    • Cash transactions
    • Discounts or rebates

Amendment to Section 44AD and Section 44ADA:

Recent amendments to the Income Tax Act have raised the limits for businesses and professionals eligible for the presumptive taxation scheme under Section 44AD and Section 44ADA. These amendments have been made to accommodate the growth of small businesses and professional firms. The key changes are:

CategoryPrevious LimitRevised Limit
Section 44AD: Small BusinessRs 2 CroreRs 3 Crore
Section 44ADA: ProfessionalsRs 50 LakhRs 75 Lakh

Condition for Revised Limit:
The revised limit is available only if 95% of the receipts are made through digital modes such as bank transfers, debit/credit cards, and digital wallets. This condition is introduced to promote a cashless economy and enhance transparency in transactions.

How Does Section 44AD Benefit Small Businesses?

  1. Simplicity in Taxation:
    Small business owners can calculate their taxable income at a fixed percentage of turnover, either 6% or 8%, without the need for maintaining detailed books of accounts. This reduces the time, effort, and cost involved in tax compliance.
  2. No Audit Requirement:
    Under Section 44AD, businesses with turnover up to the prescribed limit are not required to undergo a detailed audit, making the entire taxation process much simpler.
  3. Lower Compliance Costs:
    As the scheme eliminates the need for regular bookkeeping and audits, businesses can save costs that would otherwise be incurred for hiring accountants or auditors.
  4. Ease of Filing Returns:
    Since the income is calculated as a percentage of turnover, the process of filing income tax returns becomes much easier. The scheme ensures that businesses do not need to provide detailed financial statements, further simplifying tax filing.

Eligibility Criteria for Section 44AD:

To qualify for the presumptive taxation scheme under Section 44AD, the following conditions must be met:

  1. Nature of Business:
    The business should be a small business engaged in the sale of goods or services, except for those specified under Section 44AE.
  2. Turnover Limit:
    For businesses that opt for Section 44AD, the annual turnover or gross receipts should not exceed the prescribed limit in the previous financial year. The revised limit for small businesses is Rs 3 Crore.
  3. Mode of Payment:
    The business must receive at least 95% of its receipts through digital payment modes if they wish to avail of the revised turnover limit under Section 44AD.
  4. Exclusion of LLPs:
    Limited Liability Partnerships (LLPs) are not eligible to opt for Section 44AD. Only individual taxpayers, HUFs, and partnership firms (excluding LLPs) can benefit from this scheme.

How to Calculate Taxable Income under Section 44AD:

To calculate taxable income under Section 44AD, businesses need to follow these simple steps:

  1. Identify Total Turnover or Gross Receipts:
    Determine the total turnover or gross receipts from the business in the previous financial year. Exclude any receipts that do not form part of the total turnover (e.g., advances, deposits, cash receipts, or sale of fixed assets).
  2. Apply the Presumptive Percentage:
    Depending on the nature of the business and the mode of receipts, apply either 6% or 8% of the total turnover or gross receipts.
    • 6% is applicable for digital transactions.
    • 8% is applicable for businesses with significant cash transactions.
  3. File Income Tax Returns:
    After calculating the presumptive income, businesses can file their income tax returns (ITR 3 form for individuals, HUFs, and partnership firms).

Conclusion:

Section 44AD of the Income Tax Act offers a simple and convenient taxation method for small businesses with turnover under the prescribed limits. The presumptive taxation scheme eliminates the need for maintaining detailed books of accounts, simplifies tax filing, and reduces the administrative burden. With recent amendments increasing the turnover limits, more businesses are now eligible to benefit from this scheme, provided they comply with the requirement of 95% digital receipts.

For small business owners and professionals, Section 44AD is an excellent opportunity to streamline their tax compliance process and minimize the burden of maintaining detailed financial records. If you are a small business owner, it is essential to evaluate whether Section 44AD suits your business profile and take advantage of its benefits.

For further clarification or personalized assistance, it is advisable to consult a udaipur Chartered Accountant’s to ensure that your business is complying with the latest amendments and reaping the full benefits of the presumptive taxation scheme.

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