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-
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Category
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Previous Limits
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Revised Limits
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Section 44AD Limit For small businesses
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Rs. 2 crore
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Rs. 3 crore*
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Section 44ADA - For professionals like doctors, lawyers, engineers, etc.
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Rs. 50 lakh
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Rs. 75 lakh*
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*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.
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a) With Regard To Allowance and Disallowances
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- 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
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- 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
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- 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
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- 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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