Section 44AD: Relief from Tax Audit and Bookkeeping

Section 44AD is a provision under the Income-tax Act that allows small taxpayers engaged in certain businesses to declare their income on a presumptive basis, relieving them from the burden of maintaining detailed books of account and undergoing a tax audit. Under Section 44AD, eligible taxpayers can calculate their taxable income based on a presumptive percentage of their total turnover or gross receipts, without the need for detailed bookkeeping or tax audits.

In this guide, we will delve into the various aspects of Section 44AD, exploring its benefits, eligibility criteria, calculation methods, and recent updates. We will also compare it with other presumptive taxation schemes such as Section 44ADA and Section 44AE, shedding light on their key differences and applicability.

If you’re a small business owner who needs clear information about tax implications or a taxpayer trying to grasp the complexities of this rule, this guide will be your reliable source. It provides valuable insights and practical advice to help you effectively navigate the world of Section 44AD.

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Quick Summary of Section 44AD

The table provides a summary of key aspects related to Section 44AD of the Income-tax Act. It outlines the eligible and ineligible taxpayers, the applicable business types, the turnover/gross receipts limits, and the presumptive income rates.

Aspect	Section 44AD
Section	44AD
Eligible Taxpayers	Individuals, HUFs, and Partnership Firms (excluding LLPs)
Ineligible Taxpayers	LLPs, Companies, Trusts, Co-operative Societies
Applicable Business	Any business (excluding specifically excluded businesses)
Turnover/Gross Receipts Limit	Rs. 2 Crores (A.Y. 2023-24), Up to Rs. 3 crores (A.Y.2024-25)
Presumptive Income Rate	8% of total turnover (6% for non-cash receipts)
Excluded Businesses/Professions	Goods transport, professional services, agency businesses, commission-based income
Maintenance of Books of Accounts	Not required, but a basic record of business transactions and financial documents should be maintained
Deductions Allowed	Deductions under Sections 30 to 38 are not permitted
Audit Requirements	Exempted, unless declared profit is lower than the statutory presumption and total income exceeds the exemption limit
Mandatory Continuation	5 consecutive assessment years
Advance Tax Payment	Required, full payment on or before March 15

What is the Presumptive Taxation Scheme of Section 44AD?

Section 44AD of the Income-tax Act introduces a simplified taxation scheme for small businesses. Eligible individuals, HUFs, and Partnership Firms can calculate their taxable income on a presumptive basis if their turnover does not exceed Rs. 2 crores (or Rs. 3 crores (A.Y.2024-25) with limited cash receipts). This scheme aims to reduce compliance burdens and streamline tax calculations for qualifying taxpayers.

• The presumptive taxation scheme under Section 44AD allows small and medium enterprises to calculate and pay tax on a presumptive basis, eliminating the need for maintaining books of accounts.
• Resident individuals, HUFs, and Partnership Firms (excluding LLPs) can opt for the presumptive tax scheme.
• LLPs, companies, trusts, cooperative societies, and those claiming specific deductions are not eligible for this scheme.
• The scheme is applicable to any business conducted by eligible assessees, provided the turnover or gross receipts do not exceed Rs. 2 crores (or Rs. 3 crores (A.Y.2024-25) if cash receipts are less than 5% of total turnover).
• Certain businesses/professions like goods transport, professional services, agency businesses, and commission-based income are not eligible for this scheme.
• Presumptive income is calculated as 8% of the total turnover or gross receipts, while income received through prescribed electronic modes is taxed at 6%.
• If an assessee declares a profit lower than the prescribed percentage in five consecutive subsequent years, they will be ineligible for the presumptive scheme for the next five assessment years and must maintain books of accounts and get them audited.
• Deductions for expenses and disallowances are not permitted under Sections 30 to 38, and specific provisions related to partnership firms apply.
• Assessees opting for the scheme are required to pay advance tax, and maintenance of books of account and audit requirements are exempted unless the declared profit is lower than the statutory presumption and the total income exceeds the exemption limit.

Changes in Section 44AD for A.Y.2024-25

In the Budget 2023, certain changes were introduced to the presumptive taxation scheme under Section 44AD for the assessment year 2024-25. These changes aim to provide relief to small businesses and professionals by increasing the thresholds for turnover and income. However, it’s important to note that these revised limits are applicable only for the mentioned assessment year and are subject to a condition related to the mode of receipts. Let’s examine the revised limits:

Important Notes: The following revised limits are applicable for A.Y. 2024-25 only.

Category	Previous Limits	Revised Limits
Sec 44AD	Rs. 2 crore	Rs. 3 crore*
Sec 44ADA	Rs. 50 lakh	Rs. 75 lakh*

Eligibility Under Section 44AD

Under Section 44AD of the Income-tax Act, the following entities are eligible to opt for the presumptive tax scheme:

1. Individual: Any resident individual engaged in a business can choose the presumptive tax scheme under Section 44AD.

2. Hindu Undivided Family (HUF): HUFs involved in any business activity can also avail themselves of the presumptive tax scheme.

3. Partnership Firm: Partnership firms, excluding Limited Liability Partnerships (LLPs), are eligible for the presumptive tax scheme under Section 44AD.

Ineligibility for Section 44AD

Certain entities are not eligible to opt for the presumptive tax scheme under Section 44AD of the Income-tax Act. The following are the categories of taxpayers who cannot avail themselves of this scheme:

1. Limited Liability Partnerships (LLPs): LLPs are not eligible for the presumptive tax scheme under Section 44AD.

2. Companies: Companies, including private limited companies, public limited companies, and other corporate entities, cannot opt for the presumptive tax scheme.

3. Trusts: Trusts, whether charitable or non-charitable, are not eligible for the presumptive tax scheme under Section 44AD.

4. Co-operative Societies: Co-operative societies, including housing co-operative societies and other types of co-operatives, cannot avail themselves of the presumptive tax scheme.

Additionally, any taxpayer who has claimed deductions under Sections 10A, 10AA, 10B, 10BA, or 80H to 80RRB in the relevant assessment year is also not eligible for the presumptive tax scheme under Section 44AD.

How to Calculate Income Under Section 44AD

Under Section 44AD of the Income-tax Act, the calculation of income is simplified for eligible taxpayers who opt for the presumptive tax scheme. Here’s how the income is calculated:

1. Determine the Total Turnover: Calculate the total turnover or gross receipts from the eligible business during the financial year.

2. Presumptive Income Rate: Determine the applicable presumptive income rate based on the nature of the business. For most businesses, the presumptive income rate is 8% of the total turnover. However, for receipts through non-cash modes (cheque, bank draft, electronic clearing system, etc.) or received before the due date of filing the tax return, the presumptive income rate is 6% of the turnover.

3. Compute the Presumptive Income: Multiply the total turnover by the applicable presumptive income rate to calculate the presumptive income. This amount represents the estimated taxable income from the eligible business.

4. Tax Calculation: The presumptive income determined in the previous step is considered as the taxable income for the eligible taxpayer. The tax liability is then calculated based on the applicable income tax slab rates. (Income Tax Calculator A.Y.2023-24 & A.Y.2024-25)

It’s important to note that under the presumptive tax scheme, taxpayers are not required to maintain detailed books of accounts.

Example to Calculate Taxable Income under Section 44AD

Let’s take the example of Raj, who is engaged in the business of trading cycle parts, to understand the calculation of income under Section 44AD:

1. Determine the Total Turnover: Raj’s total turnover from the trading of cycle parts during the financial year is Rs. 1 crore.

2. Presumptive Income Rate: For trading businesses, the presumptive income rate is 8% of the total turnover. Therefore, in this case, the presumptive income rate is 8% of Rs. 1 crore, which is Rs. 8 lakhs. If the income is received through prescribed electronic modes, the presumptive income rate is reduced to 6%. Here, we will assume that all transactions are in cash mode, so we will apply an 8% Presumptive income rate.

3. Compute the Presumptive Income: Multiply the total turnover by the presumptive income rate to calculate the presumptive income. Raj’s presumptive income would be Rs. 1 crore * 8% = Rs. 8 lakhs.

4. Tax Calculation: The presumptive income of Rs. 8 lakhs is considered as Raj’s taxable income under Section 44AD. He will need to calculate his tax liability based on the applicable income tax slab rates.

It’s important to note that Raj, under the presumptive tax scheme, is not required to maintain detailed books of accounts for his business. The income of Rs. 8 lakhs, calculated under Section 44AD, will be considered as the final taxable income for Raj’s trading business.

Benefits of Section 44AD

Section 44AD of the Income-tax Act offers several benefits to eligible taxpayers who opt for the presumptive taxation scheme. Here are some key benefits of Section 44AD:

1. Simplified Tax Compliance: The scheme significantly simplifies the tax compliance process for eligible taxpayers. They are not required to maintain detailed books of accounts, making it easier to fulfill their tax obligations.

2. Presumptive Income Calculation: The scheme provides a convenient method to calculate taxable income. Taxpayers can determine their income at a prescribed rate (8% of total turnover) without the need for complex calculations or maintaining extensive financial records.

3. Reduced Burden of Audit: Taxpayers availing the presumptive tax scheme under Section 44AD are exempted from the mandatory audit requirements prescribed under Section 44AB, provided their total income does not exceed the threshold limit.

4. Cost and Time Savings: By eliminating the need for maintaining books of accounts and undergoing audit, taxpayers can save on the associated costs and time involved in complying with the regular accounting and audit requirements.

5. Lower Compliance Burden for Small Businesses: Section 44AD is particularly beneficial for small businesses, individual taxpayers, Hindu Undivided Families (HUFs), and partnership firms engaged in eligible trades or professions. It reduces the compliance burden, allowing them to focus more on their business operations.

6. Cash Transactions Considered: The scheme also considers receipts through non-cash modes, such as cheques, bank drafts, or electronic clearing systems. This ensures that businesses accepting non-cash payments are still eligible for the benefits of the scheme.

Limitations and Conditions

Section 44AD of the Income-tax Act has certain limitations and conditions that taxpayers need to consider. Here are the key limitations and conditions of Section 44AD:

1. Turnover/Gross Receipts Limit: The presumptive tax scheme under Section 44AD is applicable to businesses whose turnover or gross receipts do not exceed Rs. 2 crores in a financial year. However, this limit has been increased to Rs. 3 crores from the assessment year 2024-25 onwards, provided the cash component of receipts does not exceed 5% of the total turnover or gross receipts.

2. Exclusion of Certain Businesses and Professions: Not all businesses and professions are eligible for the benefits of Section 44AD. Professionals such as doctors, architects, chartered accountants, lawyers, and others engaged in specific professions are not covered under this scheme. Additionally, businesses involved in plying, hiring, or leasing goods carriages, agency business, or earning income in the form of commission or brokerage are also excluded.

3. Maintaining Books of Accounts: While Section 44AD offers the benefit of simplified tax compliance, eligible taxpayers are not required to maintain detailed books of accounts. However, they should maintain a basic record of their business transactions and relevant financial documents to support their income calculations.

4. Inability to Claim Deductions: Taxpayers under Section 44AD cannot claim deductions for business expenses, depreciation on assets, or other deductions allowed under Sections 30 to 38. The presumptive income rate of 8% is deemed to cover all expenses, and no further deductions are permitted.

5. Mandatory Continuation for 5 Years: If a taxpayer opts for the presumptive tax scheme under Section 44AD, they are required to continue with it for a minimum of 5 consecutive assessment years. If they wish to switch back to the regular tax provisions before completing 5 years, they will be ineligible to avail of the benefits of Section 44AD for the next 5 assessment years.

6. Advance Tax Payment: Taxpayers availing of the presumptive tax scheme under Section 44AD are still required to pay advance tax. However, unlike other taxpayers who pay in four installments, they can pay the entire advance tax due for the financial year on or before March 15.

Comparison Between Section 44AD vs 44ADA vs 44AE

The table provides a concise comparison of Section 44ADA, Section 44AD, and Section 44AE. These sections offer different presumptive taxation schemes for various types of taxpayers and businesses. Section 44ADA applies to professionals in specified professions, while Section 44AD applies to individuals, HUFs, and partnership firms engaged in any business (excluding specifically excluded businesses). On the other hand, Section 44AE is specific to businesses involved in plying, hiring, or leasing goods carriages. Each section has its own criteria for determining presumptive income and requirements for maintaining books of accounts.

Scheme	Section 44ADA	Section 44AD	Section 44AE
Applicability	Professionals in specified professions	Individuals, HUFs, Partnership firms	Individuals, HUFs, Partnership firms
Business Type	Specified professions	Any business (excluding specifically excluded businesses)	Business of plying, hiring, or leasing goods carriages
Presumptive Income	50% of gross receipts	8% of total turnover (6% for non-cash receipts)	Based on the number of vehicles and type of vehicle
Books of Accounts	Basic record of gross receipts and financial documents	Basic record of business transactions and financial documents	Record of goods carriages owned and related details
Eligibility Criteria	Gross receipts up to Rs. 50 lakhs	Turnover/gross receipts up to Rs. 2 crores (Rs. 3 crores from AY 2024-25 onwards)	Business of plying, hiring, or leasing goods carriages

In conclusion, Section 44AD of the Income-tax Act offers a simplified taxation scheme for small taxpayers engaged in certain businesses. Eligible individuals, HUFs, and Partnership Firms can calculate their taxable income on a presumptive basis, relieving them from the burden of maintaining detailed books of account and undergoing a tax audit. The scheme provides several benefits, including simplified tax compliance, reduced audit requirements, and lower compliance burden for small businesses. However, there are limitations and conditions, such as turnover/gross receipts limits, exclusion of certain businesses and professions, and restrictions on claiming deductions. Taxpayers opting for the scheme must also fulfill the mandatory continuation requirement for 5 years and pay advance tax. Overall, Section 44AD aims to streamline tax calculations and ease the compliance burden for qualifying taxpayers.

FAQ of Section 44AD

Q. Can I file an income tax return for tuition income under Section 44AD?

Section 44ADA of the Income Tax Act. Section 44ADA specifically applies to certain specified professionals such as legal, medical, engineering, architectural, accountancy, technical consultancy, and interior decoration professionals. Teachers or educational instructors are not explicitly included in this list.

Therefore, if you are a teacher or run an educational institution, you would need to consider the provisions of Section 44AD for filing your income tax return as business income.

Q. Can I file my income tax return under both sections 44AD and 44ADA as I have contract income and professional income, or can I combine both these incomes under 44AD?

A. As per Section 44AD(6) of the Income Tax Act, a person engaged in a profession is not eligible to avail of the benefits under Section 44AD, regardless of whether they are also carrying on a business. Therefore, if you have both contract income and professional income, you cannot file your income tax return under both sections 44AD and 44ADA.

Q. Which income tax return form should I use to report my income under Section 44AD?

For reporting income under Section 44AD, you would need to file your income tax return using ITR-4 (Sugam) form. ITR-4 is specifically designed for individuals and Hindu Undivided Families (HUFs) who have opted for the presumptive taxation scheme under sections 44AD, 44ADA, or 44AE of the Income Tax Act.

ITR-4 allows you to report your income from business or profession, including income calculated under the presumptive taxation scheme. It also provides sections to report other sources of income, deductions, and details of assets and liabilities, if applicable.