What is section 44AD?
Section 44AD of the Income Tax Act is a presumptive taxation scheme introduced to help small taxpayers to simplify their tax compliance. It allows eligible businesses to declare their income as a fixed percentage (6% or 8%) of turnover or gross receipts without a need to maintain books of accounts or undergo audits. This section is especially beneficial for traders, retailers, shopkeepers, and other small business owners, helping them reduce the burden of complex accounting and focus more on running their business.
What are the Advantages under Presumptive taxation?
Under presumptive taxation, small taxpayers are eligible to declare their income at a prescribed percentage of turnover or on gross receipts.
Persons declaring income under presumptive taxation:
- are not required to maintain books of accounts.
- need not get their accounts audited by a Chartered Accountant.
- can file tax returns in a simplified manner.
Section 44AD Applicable to:
- A Resident Individual or HUF carrying on the eligible business.
- A Partnership firm (other than Limited Liability Partnerships (LLPs)) carrying on the eligible business.
- A resident individual or a HUF or a Partnership firm who has not claimed deduction under any of the sections 10A, 10AA, 10B, 10BA.
Section 44AD Not Applicable to :
- a person carrying on any profession;
- a person earning income in the nature of commission or brokerage; and
- a person carrying on any agency business.
- a person carrying on the business of plying, hiring or leasing goods carriages
Turnover Limit:
The amount or aggregate of the amounts received during the previous year, in cash, in a previous year does not exceed five percent (5%) of the total turnover or the gross receipts then the turnover limit applicable under this section is rupees three crores (₹ 3 Crores).
Note : Prior to 01-04-2024 the turnover limit under this section was rupees two crores (₹ 2 Crores).
How to Calculate Income under section 44AD?
Income under section 44AD can be calculated based on the amount or aggregate of amounts of turnover or on gross receipts basis.
Income based on turnover or gross receipts is calculated as follows:
| Basis of Receipts | Percentage of Turnover declared as Income |
|---|---|
| Turnover or gross receipts received by an account payee cheque or an account payee bank draft or use of electronic clearing system through a bank account or through such other electronic mode | 6% (six percent) of Turnover or gross receipts |
| Turnover or gross receipts received by way of cash | 8% (eight percent) of Turnover or gross receipts |
Even a higher sum can be declared by the assessee as Income.
Benefits of Section 44AD
- No need to maintain books of accounts.
- Need not get the books of accounts audited from a Chartered Accountant.
- Simple return filing procedure.
Advance Tax Compliance
Taxpayers opting to file return under section 44AD are required to pay the advance tax in the last instalment (i.e 15th March instalment) if the liability to pay advance tax arises.
🔗 suggested post :
Advance Tax – Who needs to pay & How to pay?
Important Points to be considered
- Deductions under section 30 to 38 of the Income Tax Act such as Rent, Repairs & Maintenance, Investment Allowance, Scientific Research etc. will not be allowed.
- Depreciation under section 32 of the Act shall be deemed to have been calculated.
- 5 Year Lock-in period – Once the taxpayer moves out of this section, he cannot opt back into section 44AD for the next 5 years.
- Lower Income declaration – If the taxpayer wants to declare lower income than the prescribed limits and his/her total income exceeds the basic exemption limit they must
- Maintain books of accounts or other documents as prescribed in Section 44AA; and
- Get the books of accounts audited and furnish an audit report as per Section 44AB.
Example on Section 44AD:
Example 1 : Mr.X is carrying on the business of retail trading of goods. He receives receipts from the business in the following manner: ₹ 50 lakhs in electronic mode and ₹ 10 lakhs in cash. In this case will he be eligible to opt for section 44AD.
In this case, Mr.X is eligible to opt for section 44AD. The income under section 44AD is as follows :
Business Income = ₹ 50 lakhs x 6% + ₹ 10 lakhs x 8% = ₹ 3 lakhs + ₹ 0.80 lakhs = ₹ 3.80 lakhs
Frequently Asked Questions (FAQs)
Can a NRI opt for Section 44AD?
No. This section is not applicable to non-residents. In other words, applicable to Individual, a HUF or a partnership firm (not Limited Liability Partnership Firm).
Under which sections deductions cannot be claimed if I opt for section 44AD?
Deductions under section 10A/10AA/10B/10BA or under sections 80HH to 80RRB.
Which ITR form should I file if presumptive taxation is opted?
♦ ITR-4 (Sugam) can be filed by taxpayers who have income from Salary, one House Property, Agricultural Income (up to ₹ 5000/-) and Income from Other Sources such as Interest, Dividend etc.
♦ In other cases ITR-3 is required to be filed.
📢 Now Offering Professional Tax Services!
We’re excited to announce the launch of our new Tax Services section! Whether it’s income tax filing, GST return support, or other compliance solutions, we’re here to help individuals, businesses, and NRIs navigate Indian tax systems with ease.
👉 Explore Our Tax Services
