Sections 44AD and 44ADA of the Income Tax Act, of 1961, offer a simplified taxation scheme for small businesses and professionals, respectively. These sections allow taxpayers to declare their income at a presumptive rate, reducing the need for maintaining detailed books of accounts and undergoing audits. However, many taxpayers often wonder about the types of income and expenses they need to report under these sections. This blog provides a detailed explanation of the types of income and expenses to consider when filing 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
a. Applicable to individuals, Hindu Undivided Families (HUFs), and partnership firms (except LLPs).
b. 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
a. Applicable to resident individuals and partnership firms (except LLPs).
b. The profession should be listed under Section 44AA(1), including legal, medical, engineering, architectural, accountancy, technical consultancy, interior decoration, and other specified professions.
Types of Income to Report
Section 44AD: Business Income
Under Section 44AD, you should report all receipts from your business activities. This includes.
a. Sales Income: Revenue generated from the sale of goods or products.
b. Service Income: Income earned from providing services related to the business.
c. Other Business Receipts: Any other income arising from business operations, such as trade discounts, commission on sales, and other operational receipts.
Section 44ADA: Professional Income
Under Section 44ADA, you should report all receipts from professional services provided. This includes:
a. Professional Fees: Fees charged for professional services rendered, such as consulting, legal advice, medical services, architectural design, engineering services, accountancy, and other specified professions.
b. Other Professional Receipts: Any other income arising from professional activities, such as royalties, commission for consultancy, and other related receipts.
Types of Expenses Considered
Under Sections 44AD and 44ADA, the presumptive income rates already account for the expenses incurred. Therefore, you do not need to list individual expenses in detail. However, it’s important to understand the types of expenses that are generally covered under these sections:
a. Operating Expenses: These include day-to-day expenses necessary for running the business or profession, such as.
- Rent
- Utilities (electricity, water, internet)
- Office Supplies
- Salaries and wages
b. Administrative Expenses: Expenses related to the management and administration of the business or profession, such as.
- Office administration costs
- Legal and professional fees
- Accounting fees
c. Marketing and Advertising: Costs incurred for promoting the business or profession, including.
- Advertising expenses
- Promotional events
- Digital Marketing
d. Travel and Conveyance: Expenses related to business or professional travel, including.
- Local travel
- Business trips
- Fuel and vehicle maintenance
e. Depreciation: Depreciation on fixed assets used in the business or profession, such as.
- Office equipment
- Computers and software
- Furniture and fixtures
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.
a. Use ITR-4 Form: The ITR-4 form is specifically designed for taxpayers opting for the presumptive taxation scheme under Sections 44AD and 44ADA.
b. Enter Gross Receipts/Turnover: Report the total gross receipts or turnover of your business or profession.
c. Presumptive Income Calculation: Declare the presumptive income based on the prescribed rate (8%/6% for Section 44AD and 50% for Section 44ADA).
d. 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.
e. 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.
a. Bank Statements: Keep records of all digital transactions and bank statements.
b. Receipts and Invoices: Maintain receipts and invoices for income and significant expenses.
e. Tax Deduction Certificates: Keep certificates such as Form 16 or Form 16A, which are issued for tax deducted at source.
Example for Section 44AD
Gross Receipts/Turnover: ₹50,00,000
Presumptive Income (8%): ₹4,00,000 (or 6% for digital receipts, which would be ₹3,00,000)
Expenses: All business expenses are deemed to be included in the presumptive income of ₹4,00,000 or ₹3,00,000.
Example for Section 44ADA
Gross Receipts: ₹30,00,000
Presumptive Income (50%): ₹15,00,000
Expenses: All professional expenses are deemed to be included in the presumptive income of ₹15,00,000.
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.
By understanding the types of income to report and the nature of expenses covered, you can efficiently file your tax returns under these sections and take full advantage of the benefits offered by the presumptive taxation scheme.