written by Khatabook | July 19, 2021

Section 44AD of Income Tax- Features & Applications

The Government of India has introduced various taxation schemes to ease the financial burden of maintaining taxes. Section 44AD is a taxation scheme where individuals such as business owners and small-scale enterprises are not required to audit their account books for filing taxes. 

Recent updates in the 2020 General Budget made recent updates that now includes individuals who earn less than Rs 50 lakhs to receive the benefits of Section 44AD. Suppose you are running a small business and need to declare your income to the Government. In that case, the provisions of Section 44AD of the Income Tax Act (1961) apply to you.

What is Section 44AD of Income Tax?

The Income Tax department of India has framed two sections for filing presumptive tax returns: Section 44AD and Section 44AE. The section 44AD income tax scheme is for assessees who are considered small taxpayers and forced to do the tedious job of maintaining accounts books to record income proof. Section 44 AD of the Income Tax Act provides relief to such taxpayers.

The only individuals exempted from this scheme are those involved in plying, hiring, and leasing goods carriages as referred under Section 44AE. 

Eligibility Criteria of Section 44AD of Income Tax Act 

Under Section 44AD, the income is presumed to be at 8% of the total turnover of businesses. For assessees with a gross annual income exceeding Rs 2 crores, income tax would be computed as per usual tax provisions and they will be exempt from Section 44AD’s benefits. 

When an assessee applies for Section 44AD, they can not claim deductions in expenses and depreciation allowed under sections 30 to 38. The Government also gives incentives up to 8% of the total turnover for businesses doing transactions digitally.

The following assessees are eligible for Section 44AD Income Tax Act:

  • Individuals who offer their professional services or have firms
  • Partnership firms (excludes limited liability partnership firms)
  • Hindu undivided families
  • Professionals such as lawyers, doctors, technical consultants, interior designers, engineers, architects, and chartered accountants
  • Professionals/businesses which do not have a gross turnover from the previous year not exceeding Rs 1 crore
  • Individuals who have not filed for any deductions under sections 10A, 10AA, 10B, 10BA, 80HH, and 80RRB during the assessment year

The following individuals/businesses are not eligible for tax deductions under income tax section 44AD:

  • Individuals who run their brokerage firms, agencies, or make commission-based earnings 
  • Persons engaged in professions listed under Section 44A (1)
  • Businesses who have a gross or total turnover exceeding Rs 2 crores
  • Indians who are non-residents and foreigners
  • Individuals who have already filed for tax deductions through Sections 10A, 10AA, 10B, and 10BA during the assessment year

Also Read: Income Tax Rebate Under Section 87A

Features of Section 44AD of Income Tax Act

Tax paid by individuals and business owners is calculated at 8% of the total gross turnover rate for the financial year. For businesses doing digital transactions, the turnover calculation rate is set to 6% of their gross yearly income.

Tax deductions under Section 44AD apply to businesses and professional services that have a gross turnover below Rs 1 crore yearly. However, this limit has been raised to Rs 2 crores since Budget 2020.

Income tax computed for Section 44AD will be subject to deductions as per the slabs laid down by the Government of India under the Income Tax Act of India.

Section 44AD provisions apply to various businesses and professions, excluding the ones referred to in Section 44AE.

Assessees filing for presumptive income tax returns under Section 44AD will not be eligible for further deductions or expenditures, with the exclusion of interests and payments made to partners.

To Whom Does Section 44AD of Income Tax Act Apply?

Section 44AD provisions apply to all types of businesses and professional services. The only exceptions are those dealing with plying, hiring, and renting goods.

Individuals who do not wish to file their income tax under Section 44AD and have a gross annual income that falls below the 8% total turnover threshold have to maintain a book of accounts every year and get the same audited by a professional Chartered Accountant

Section 44AD’s provisions do not apply to professions mentioned by Section 44AA. Individuals or businesses dealing with any commission-based work, brokerages, referrals, or agencies are not eligible for claiming deductions under this section.

Benefits of Section 44AD of Income Tax Act

You get a lot of benefits when you claim tax deductions under the Section 44AD scheme. The major ones are:

  • You don’t have to pay advance tax if you are filing for Section 44AD
  • If you operate a partnership firm, you can claim deductions from interest and remunerations paid to partners under limits set by Section 40 (b)
  • No need to maintain a book of accounts. You don't have to keep a record of financial transactions, statements nor audit your accounts under this scheme

Limitations of Section 44AD of Income Tax Act 

You cannot apply for disallowances under Sections 40, 40A, and 43B when opting for Section 44AD of Income Tax Act.

Section 44AD of Income Tax Act considers the following items when computing the turnover of businesses:

  • Delivery service charges
  • Excise duties and VAT
  • Sale of unusable empties and packages
  • Cess

Below is a list of limitations set under Section 44AD:

  1. The income is calculated on a presumptive basis under this scheme. Section 44AD was designed to reduce the tax liability burden of small business professionals. 
  1. There are no disallowances as referred under sections 40, 40A, and 43B.
  1. Individuals must pay advance tax before the 15th of March or before the end of the financial year.
  1. Presumptive tax deductions come under the pay-as-you-earn model, and payments to the Income Tax Department are usually made in instalments by businesses.
  1. Deductions made under this scheme have to follow the written down value method of depreciation for assets.
  1. Gross receipts related to interest income, inventory value, advance payments from customers, retention money, and property sale, plant, and equipment are not counted. 

How Section 44 AD of Income Tax Act Works

For example, let’s suppose you are Mr Shah, and your provisions store has a gross annual turnover of Rs 90 lakhs. You can then avail of the benefits of Section 44AD and avoid doing tedious paperwork by filing under the presumptive taxation scheme. The provisions of Section 44AD focuses on small businesses and medium-size ventures that have not claimed any tax deductions under sections 10A, 10AA, 10B, and 10BA during the assessment year.

Your business’s gross annual turnover rate that you declare under this scheme is just an estimate and comes to 8% of your gross annual receipts. As a business owner, you are allowed to claim a higher or lower yearly gross turnover rate than your presumptive income under this scheme.

In Mr Shah’s business that earned Rs 90 lakhs last year, his annual presumptive tax would be estimated to be approximately 7.2 lacs approximately (8% of Rs 90 lacs).

Amendments to Section 44AD of Income Act

There are special provisions for profits and losses made by businesses under Section 44AD. They are:

  • According to the relevant assessment years, assets referred under sub-section (1) should be included in tax computations and eligible for deductions.
  • Interests and remunerations paid to partners will be deducted from the computed income if the assessee runs a firm.
  • Businesses that apply for tax returns under Sections 44AA and Section 44AB will not be eligible for provisions mentioned under Section 44AD. They must exclude the gross receipts and monetary limits set by this section during computations.

Important Details to Keep In Mind 

If you are deciding to file your tax liabilities under Section 44AD of Income Act, here are a few details to keep in mind:

  1. If you operate multiple businesses, the total turnover from all those businesses combined is considered for computing estimated income.
  1. You can avail of tax benefits that fall under Chapter VI-A of the Income Tax Act, 1961, when applying for this scheme.
  1. Individuals offering professional services and operating businesses can get the benefits of Section 44AD of Income Tax Act. They can get earnings from the profession calculated according to guidelines laid down by standard provisions in the ITA.
  1. Suppose your business has a total turnover exceeding Rs 1 crore. In that case, you will have to declare a higher income under the ITA and avail of tax deductions at an 8% rate afterwards.
  1. If you earn in the form of commissions partially from your business, you will have to declare it and be ready to pay advance tax, provided commissions earned are greater than the taxable limit of Rs 10,000

Also Read: Income Tax Slabs 2021 & Tax Rates For FY 2020-21/ FY 2019-20/ FY 2018-19

Conclusion

Every business has to maintain its profit & loss statements, official books of accounts, and other documents based on which its tax liabilities are calculated. However, with the introduction of Section 44 AD of Income Tax Act, they are offered exemption from auditing the book of accounts and are prescribed a rate outlined by the slabs under the Presumptive Taxation Scheme. You can apply for Section 44AD online directly by visiting the income tax of India website, file through a CA, or a private agency.

FAQs

1. Can I opt out of Section 44AD whenever I want?

Yes, it is possible to opt out of Section 44 AD of Income Tax Act. However, remember that you won’t be able to avail of the scheme’s benefits for the next 5 years when you do so. You also have to get your accounts audited under Section 44AB after that.

2. How do I file my Income Tax Returns to get the benefits of Income Tax Section 44AD?

You have to file your income tax returns through ITR Form 4 Sugam to avail the benefits of Income Tax 44AD Section.

3. Are Private Limited Companies eligible for benefits under this scheme?

No, private limited companies cannot avail of the benefits of Sec 44AD of Income Tax Act.

4. If I run a business and an agency, can I apply for this scheme?

If you run a business unrelated to plying, hiring, or leasing goods, you can apply for the scheme. You cannot register your agency for the benefits, however. Since 2016-17, all professionals making less than Rs 50 lacs per year are eligible for Section 44AD Income Tax Act.

5. What happens if I declare lower or higher income under this scheme?

Suppose you declare a lower or higher income than the estimated income considered under the presumptive taxation scheme, and that amount exceeds Rs 2 lacs which is the maximum exemptable amount for tax deductions. In that case, you will have to submit your book of accounts as per Section 44A and get them audited by Section 44AB. 

6. Is it mandatory to maintain a book of accounts under presumptive income?

Suppose you are a business applying for the presumptive income scheme. In that case, you can get some relaxation for maintaining your book of accounts. But that is possible only if your profits are below the 6% to 8% threshold of gross receipts and your total taxable income is below the exemption limit. If you are applying for tax deductions through any other scheme, you must maintain a book of accounts compulsorily.

7. I run multiple businesses, and all of them fall under the presumptive taxation scheme of Section 44AD. How is my turnover calculated, and can I register them all?

Your total turnover will be calculated by counting the turnovers of your individual businesses and adding them. Yes, you can register all your businesses for Income Tax 44AD in this case.

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