Section 44AD is a presumptive taxation provision enacted by the Income Tax Act to reduce the tax burden on small taxpayers or assessees. Individuals covered by this plan are not required to keep or display books of account, nor are they obligated to have them audited.
Section 44AD exempts certain people and professionals from having to undergo an audit or show their books. This does not apply to assesses whose occupations are listed in Section 44AA.
With the exception of the firms listed in Section 44AE, the scheme attempts to give relief to small-time assessees who run any type of company.
What is Section 44AD - Significant Characteristics
- The assessee's tax under Section 44AD is calculated at 8% of his or her gross turnover for the year, provided that his or her gross sales are less than Rs 2 crore.
- Income calculated under this provision is liable to taxation in accordance with the Income Tax Act's slab rates.
- Assesses who claim deductions under this provision would not be able to claim any further expense or depreciation, with the exception of interest or payments paid to partners.
- With the exception of those listed in Section 44AE - the provisions of this section apply to any business or profession.
Who is Eligible for Section 44AD?
The following tax assessors are eligible to use the provisions of Section 44AD's presumptive taxation scheme-
- Resident Individual taxpayers
- Partnership Firm
- Hindu Undivided Families
The following conditions must be met in order to implement taxation on presumptive income under section 44ad of the Income Tax Act-
The previous year's gross receipts or annual turnover of the organization or individual should not have surpassed Rs. 2 crores.
Budget 2023 Updates about Section 44AD and Section 44ADA
Budget 2023 amended Section 44AD and Section 44ADA and have revised presumptive taxation limits for Financial Year 2023-24 (AY 2024-25) as follows-
Category | Previous Limits | Revised Limits |
Section 44AD LimitFor small businesses | Rs. 2 crore | Rs. 3 crore* |
Section 44ADA - For professionals like doctors, lawyers, engineers, etc. | Rs. 50 lakh | Rs. 75 lakh* |
*Note -The increase in limits is subject to a specified condition that the 95% of the receipts must be through online medium.
Application of Section 44AD
Understand the Section 44AD applicability here-
- Section 44AD's rules apply to all types of enterprises except those involving the leasing, plying, or renting of products. Because these enterprises fall under the restrictions of Section 44AE, the taxpayer can't claim deductions under Section 44AD.
- Any assessee who desires to file income tax returns under this section may do so at a rate of eight per cent or more. If he or she selects not to file returns under this section and has a turnover that is less than 8% of total returns, the individual would be obliged to keep the books of accounts and have them audited by a licensed CA.
- Section 44AD will not be applicable to assessees who practice any of the professions listed in Section 44AA. Assesses who work for the agency or earn money through commissions or broker agreements are ineligible to claim deductions under this clause.
- Individual assessees, Hindu Undivided Families, and partnerships who are Indian residents can claim deductions under Section 44AD. Limited liability partnerships are not covered by this provision.
a) With Regard To Allowance and Disallowances |
- If an assessee files his or her returns under Section 44AD, he or she will be unable to claim deductions under Sections 30 to 38 of the Income Tax Act. This includes any type of depreciation.
- If an assessee chooses to file his or her returns under Section 44AD, no disallowance will be allowed under Sections 40, 40A, or 43B.
- If the assessee is a partnership firm and decides to submit its returns under Section 44AD, further deductions can be claimed under Section 40(b) for any salary or interest given to the firm's partners. This deduction, however, can only be claimed up to a specified maximum set forth in Section 40(b).
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b) With Regard To Advance Tax | - If an assessee chooses to file returns or claim deductions under Section 44AD, he or she will not be required to pay any sort of tax in advance on the income produced via the company as specified in Section 44AD.
- However, if the assessee's income is in the form of a commission, he or she must pay Advance Tax if the commission generated exceeds the taxable limit of Rs 10,000.
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c) With Regard to Depreciation Assets | - In general, any assessee who decides to file tax returns under Section 44AD will be unable to claim any further deductions for any expenses or depreciation incurred.
- However, for any asset used by a firm that falls under the criteria of Section 44AD, the written down value of the said asset will be computed in such a way that depreciation of the asset is permitted and claimed in accordance with the terms of Section 32.
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d) With Regard to Professionals | - From the 2016-17 fiscal year and onwards, any assessee who is a professional would be entitled to claim deductions and advantages under Section 44AD, provided that his or her total income generated during the fiscal year does not exceed Rs 75 lakhs.
- The taxable income of any professional claiming deductions under this section will be assumed to be 50% of total receipts for the fiscal year.
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FAQs
Section 44AD Income Tax Act in India offers a simplified presumptive taxation scheme for small businesses. To qualify for this scheme, the taxpayer must be a resident individual, a Hindu Undivided Family (HUF) or a partnership firm (excluding Limited Liability Partnerships or LLPs).
What are the requirements for 44AD? ›
Your turnover must be less than Rs 3 Crore(if 95% of the receipts are through online modes) or Rs. 2 Crore (if 95% of receipts are not through online modes) . b. Your minimum net income should be 8% of your turnover (the minimum net income should be considered 6% in the case of digital receipts).
What is the difference between 44AD and 44ADA? ›
Key Differences Between Section 44AD and Section 44ADA:
Presumptive Income Rate: Businesses under Section 44AD declare income at 6% or 8%, depending on the transaction mode. In contrast, professionals under Section 44ADA declare 50% of their receipts as income.
Which ITR is applicable for 44AD? ›
ITR-4 is the Income Tax Return form for taxpayers who opt for a presumptive income scheme under Section 44AD, Section 44ADA and Section 44AE of the Income-tax Act,1961.
Can F&O income be shown under 44AD? ›
Can F&O income be shown under Section 44AD? Yes, F&O can be shown under Section 44AD, as it can be taken under the head business income. Can I opt for new regime if I am doing F&O trading? Yes, you can opt for the new regime, there is no restriction on it.
What is the example of Section 44AD? ›
For example-
If Mr x has a firm with an annual turnover of Rs 80 lakh for last financial year. He opts for presumptive taxation and compute his presumptive income to be 8% of 80 lakh which is equal to Rs. 6,40,000.
What is tax audit applicability of u s 44AD? ›
Income tax audit under section 44AD
If your turnover from the previous year does not exceed the Rs. 2 crore limit, then under section 44AD of the Income Tax Act, you can opt for presumptive taxation. However, to do that, you need to be: An Indian resident. A resident of a Hindu Undivided Family.
Can a person use 44AD and 44ADA simultaneously? ›
Can Section 44AD and Section 44ADA be claimed together? Yes, an individual can claim benefit of Section 44AD and Section 44ADA simultaneously if he/she has income from both profession as well as business.
Can we switch from 44AD to 44ADA? ›
Yes, you can opt both Section 44AD and Section 44ADA together, if you have income from business as well as specified professionals.
Which profession is calculated under section 44ADA? ›
Eligibility Criteria for Presumptive Income Under Section 44ADA. To qualify under this scheme, you need to meet the following criteria: If you are an individual professional, such as a doctor, lawyer, or architect, and your annual gross receipts are less than ₹75 lakh, you are eligible for this scheme.
The 5-year rule under section 44AD states that once taxpayers opt for the presumptive taxation scheme, they must continue to do so for five consecutive years. If they choose to exit the scheme before the five-year period ends, they become ineligible to opt for the scheme for the next five assessment years.
Is deduction allowed in 44AD? ›
However, if you are taking advantage of Section 44AD, you cannot avail any tax deductions or exemptions under Sections 30 to 38 - for depreciation or unabsorbed depreciation, for example. Similarly, you cannot claim any disallowance under sections 40, 40A and 43B.
Can 44AD claim 80C? ›
An assessee can claim tax deductions and avail benefits under Chapter VI-A (Section 80C to 80U) even if he is declaring income as per presumptive taxation scheme under Section 44AD of the Income Tax Act.
What are the exceptions for 44AD? ›
Section 44AD's rules apply to all types of enterprises except those involving the leasing, plying, or renting of products. Because these enterprises fall under the restrictions of Section 44AE, the taxpayer can't claim deductions under Section 44AD.
How do you calculate income under 44AD? ›
If you opt for presumptive taxation under Section 44AD, your net income is considered as 8% of your turnover and you will pay tax on that income. If your receipts are in digital (non-cash) form then only 6% of your receipts is your net income and you will pay tax on that income.
Can professional income be shown under 44AD? ›
Likewise, many are unaware that freelancers, professionals, and consultants can pay income tax on half of their gross annual income. Nonetheless, to enjoy this benefit under the 44ADA income tax, the total income for a freelancer in a financial year should be less than Rs 50 lakh.
How is the 44AD of Income Tax Act calculated? ›
If you opt for presumptive taxation under Section 44AD, your net income is considered as 8% of your turnover and you will pay tax on that income. If your receipts are in digital (non-cash) form then only 6% of your receipts is your net income and you will pay tax on that income.
Can I switch to 44AD? ›
The scheme under 44AD Income Tax Act is intended for small businesses and professionals including sole proprietors, partnerships and LLPs. To be eligible the business's total turnover or gross receipts should not exceed INR 3 crores per financial year (as of August 2023 subject to changes).
What is the 44AA of Income Tax Act? ›
"Maintaining account books" refers to keeping an account of all transactions undertaken by the individual or firm during an assessment year. The following books of accounts have to be maintained under Section 44AA: Cash book: A daily record of all cash receipts, payments and cash balance.
