Simplifying Taxes for Small Businesses: Understanding Sections 44AD

Author name: Ashish Gambhir

Created date: 22-05-2024

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Maintaining the complexities of income tax can be difficult for small business owners and professionals. To ease this burden, the Indian Income Tax Act offers a simplified presumptive taxation scheme under Sections 44AD and 44ADA. These provisions are designed to streamline tax compliance and reduce the administrative load on micro, small, and medium enterprises (MSMEs) and certain professionals by allowing them to declare income on a presumptive basis. In this blog, we will discuss the specifics of these sections, exploring their eligibility criteria, benefits, Key Points to remember and how they can simplify the tax filing process for eligible taxpayers.

Eligibility:

Section 44AD is a presumptive income option for eligible assesse. As provided in the Income tax act 1961, any individual, HUF or Partnership (Except LLP) having eligible business (other than business of plying, hiring or leasing goods carriage, commission or brokerage or agency business), whose turnover or gross receipts less than 2 crore can opt for aforesaid section.

Presumptive Income

Taxpayer are allowed to declare their income at prescribed rate of 8% (6% in case of digital receipts) of the total turnover or gross receipts or the actual profit amount higher than the aforesaid amount.

Further it is provided that if more than 95% of transactions are made through digital channels (payee cheque, account payee bank draft or bank transfer and other as specified) then the limit is increased to 3 crore(As amended by Finance Act 2023)

As stated in income tax act, the percentage given to declare profit is 8% or 6% which is minimum and not maximum so in case any assesse has income greater than this limit, he/she should declare higher income. This presumptive scheme should not be misinterpreted to show lower income instead this scheme allows taxpayer to take benefit of not maintaining books and records for his actual income

Key Points to Remember:

• By opting this section, it will be considered that all the deductions available under section 30 to 38 are already availed and you cannot further take any deduction.
• The WDV of any asset will be deemed as calculated as provided in section 44AD.
• Business do not have to maintain book of accounts, other records.
• If your actual profit is more than the presumptive amount then you should declare higher profit as specified in Income tax Act
• Taxpayer need to file ITR 4 (SUGAM) if they are opting for 44AD
• Taxpayer will have to pay advance tax in one installment on or before 15 th March of every Financial year.

Opting back to Normal taxation

Once you choose to opt section 44AD then you will have to continue the same for subsequent five years from the relevant previous year of opting. If in any succeeding 5 years, you declare profit according to normal taxation then you will lose all the benefits of section 44AD. Also you will have to get your accounts audited in that year in which your declared total income (as per normal provisions) exceeds the limit not chargeable to tax. You will also not be allowed to opt again section 44AD for 5 succeeding years from the relevant year of not opting 44AD.

In case, taxpayer didn’t opt 44AD due to non-eligibility of this provision and declare profit as per normal provision then he can opt presumptive scheme again in next year in case of eligibility.

Let’s understand this from an example:

Example 1:

Mr. A declares his income for AY 2023-24 as per Presumptive Income 44AD and in AY 2024-25, he wants to declare his income as per normal provisions and his total income is Rs 7 lakh. Now as per Income Tax Act, he can opt normal provision but as his total income exceeds the limit chargeable to tax so he will have to get his accounts audited as per Section 44AB. Also he cannot opt presumptive scheme for next five years.

Example 2:

In the above case, Mr. A declare his income as per normal provision in the AY 2024-25 due to non-eligibility of 44AD then he can opt presumptive scheme from AY 2025-26 and take all benefits of that scheme.