Sections 44AD and 44ADA of the Income Tax Act provide simplified tax schemes for small businesses and professionals in India. These sections are designed to reduce the burden of maintaining detailed books of accounts and undergoing audits for eligible taxpayers. A common question among taxpayers is whether they can show their expenses under these sections. This blog will provide a detailed explanation of how expenses are treated under Sections 44AD and 44ADA.
Understanding Section 44AD and 44ADA
Section 44AD: Presumptive Taxation for Small Businesses
Section 44AD is applicable to small businesses with a turnover of less than ₹2 crore. This section allows eligible businesses to declare their income at a prescribed rate of 8% of their turnover. If the business receipts are through digital means, the presumed income rate is reduced to 6%.
Eligibility Criteria for Section 44AD
Applicable to individuals, Hindu Undivided Families (HUFs), and partnership firms (except LLPs).
The business should not be engaged in plying, hiring, or leasing goods carriages, agency businesses, or businesses earning income from commission or brokerage.
Section 44ADA: Presumptive Taxation for Professionals
Section 44ADA is designed for professionals with gross receipts of less than ₹50 lakh. Under this section, eligible professionals can declare their income at a flat rate of 50% of their gross receipts.
Eligibility Criteria for Section 44ADA
Applicable to resident individuals and partnership firms (except LLPs).
The profession should be listed under Section 44AA(1), including legal, medical, engineering, architectural, accountancy, technical consultancy, interior decoration, and other specified professions.
Treatment of Expenses Under Sections 44AD and 44ADA
Under Sections 44AD and 44ADA, taxpayers cannot claim any further deductions or expenses. The presumptive income calculated at the prescribed rate is considered the final taxable income. This means:
- Expenses Included: The presumed income rate already takes into account the expenses incurred. Therefore, you do not need to and cannot separately list expenses such as rent, salaries, utilities, etc.
- No Additional Deductions: You cannot claim any further deductions for business or professional expenses. The income declared under these sections is deemed to be after considering all expenses.
Example for Section 44AD.
- Turnover: ₹1,00,00,000
- Presumed Income: 8% of ₹1,00,00,000 = ₹8,00,000 (or 6% for digital receipts)
- Expenses: All business expenses are deemed to be included in the presumptive income of ₹8,00,000. No separate expense deduction is allowed.
Example for Section 44ADA.
- Gross Receipts: ₹40,00,000
- Presumed Income: 50% of ₹40,00,000 = ₹20,00,000
- Expenses: All professional expenses are deemed to be included in the presumptive income of ₹20,00,000. No separate expense deduction is allowed.
Filing Under Sections 44AD and 44ADA
To avail of the benefits of Sections 44AD and 44ADA, taxpayers must file their returns using the appropriate Income Tax Return form. Here’s how to do it.
- Use ITR-4 Form: The ITR-4 form is specifically designed for taxpayers opting for the presumptive taxation scheme under Sections 44AD and 44ADA.
- Enter Presumptive Income: In the “Income from Business & Profession” section, enter the presumptive income calculated as per the prescribed rates.
- Claim Deductions Under Chapter VI-A: While business or professional expenses cannot be claimed, you can still claim deductions under Chapter VI-A, such as Section 80C (investments), Section 80D (medical insurance premiums), etc.
- Verify and Submit: Verify all the details entered in the ITR-4 form and submit the return electronically on the Income Tax Department’s e-filing portal.
Simplified Record Keeping
One of the significant advantages of Sections 44AD and 44ADA is the reduced compliance burden. While detailed accounts are not required, it is advisable to maintain basic records to substantiate your turnover or receipts. This includes.
- Bank Statements: Keep records of all digital transactions and bank statements.
- Receipts and Invoices: Maintain receipts and invoices for income and significant expenses.
- Tax Deduction Certificates: Keep certificates such as Form 16 or Form 16A, which are issued for tax deducted at source.
Conclusion
Sections 44AD and 44ADA offer a simplified and efficient way for small businesses and professionals to manage their tax compliance. By declaring income at a flat rate, these sections eliminate the need for maintaining detailed accounts and claiming specific expenses. The presumed income rates already account for the expenses incurred, making the tax filing process straightforward.
If you are eligible for these sections, understanding the treatment of expenses and the filing process can help you take full advantage of the benefits offered by the presumptive taxation scheme. By following the guidelines outlined in this blog, you can ensure compliance with tax regulations and simplify your tax filing experience.