Section 44AD of the Income Tax Act is a presumptive taxation scheme designed to simplify the tax filing process for small taxpayers. This section allows eligible taxpayers to declare income as a percentage of their turnover or gross receipts, thereby reducing the burden of maintaining detailed books of accounts.
Basic Concepts.
Who can opt for Section 44AD?
- Resident Individuals.
- Hindu Undivided Families (HUFs).
- Partnership firms (excluding LLPs).
Note: It is not applicable to Limited Liability Partnerships (LLPs), companies, and certain professionals specified under section 44AA(1).
Turnover Limit
The gross receipts or turnover should not exceed Rs. 2 crore in a financial year.
Excluded Businesses.
The scheme does not apply to
- Businesses engaged in plying, hiring, or leasing goods carriages (covered under section 44AE).
- Persons carrying on professions as specified under section 44AA(1).
- Businesses involved in agency business or earning income in the nature of commission or brokerage.
- Presumptive Income:
- Under this scheme, the income is presumed to be 8% of the turnover or gross receipts. For payments received digitally or through banking channels, the presumptive rate is reduced to 6%.
Maintenance of Books and Audit.
Taxpayers opting for Section 44AD are exempt from maintaining detailed books of accounts as required under Section 44AA.
They are also exempt from getting their accounts audited under section 44AB, provided they continue to declare income as per the presumptive scheme.
Deductions and Expenses.
The presumptive income calculated under Section 44AD is considered to have included all deductions under Sections 30 to 38. Therefore, no further expenses or deductions are allowed from the presumptive income.
Advance Tax.
Taxpayers opting for the presumptive scheme under Section 44AD are required to pay the entire amount of advance tax by the 15th of March of the financial year.
Restriction on Carry Forward of Losses.
Losses related to the business under Section 44AD cannot be carried forward to the next year.
Five-Year Restriction.
If a taxpayer opts for the presumptive taxation scheme under Section 44AD, they must continue to do so for the next five consecutive years. If they opt out of the scheme before the completion of five years, they will be ineligible to opt for the scheme for the subsequent five years.
Filing the Income Tax Return
ITR Form
- Taxpayers opting for Section 44AD need to file their income tax returns using ITR-4 (Sugam).
- Details to be Provided:
- Business details such as name, nature, and address.
- Total turnover or gross receipts.
- The presumptive income is calculated at 8% or 6%, as applicable.
Illustrative Example
Mr. A, a resident individual, runs a small retail business. His total turnover for the financial year 2024-25 is Rs. 1.5 crore.
Calculation under Section 44AD
Presumptive Income @ 8% = Rs. 12,00,000.
If 60% of the turnover is received through banking channels
Income on Rs. 90,00,000 (received digitally) @ 6% = Rs. 5,40,000.
Income on Rs. 60,00,000 (received in cash) @ 8% = Rs. 4,80,000.
Total Income = Rs. 10,20,000.
Comparison with Regular Provisions
Under regular provisions, Mr. A would need to maintain books of accounts, report actual income, claim actual business expenses, and possibly get his accounts audited if the turnover exceeds Rs. 1 crore. Opting for Section 44AD simplifies the compliance burden significantly.
Important Considerations
Applicability of Other Sections
While Section 44AD provides a simplified method of calculating income, other provisions of the Income Tax Act, such as TDS, advance tax, and provisions relating to the set-off and carry forward of losses, still apply.
Record-Keeping
Though detailed books are not required, it is advisable to keep basic records of turnover or gross receipts to substantiate the income declared under Section 44AD.
GST Compliance
Businesses opting for Section 44AD must also ensure compliance with GST laws, as they are not exempt from GST registration and filings.
Conclusion
Section 44AD of the Income Tax Act offers a simplified taxation process for small businesses by allowing them to declare income based on a percentage of their turnover. This reduces the need for maintaining detailed accounts and undergoing audits, thus easing the compliance burden. However, taxpayers must carefully assess their eligibility and the implications of opting for this scheme to ensure full compliance with all applicable tax laws.
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