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Section 44AD
Big business owners have the habit of regularly maintaining books for their accounts. So, auditing their books of accounts is done by tax firms. However, many small businessmen and professionals do not work on such a large scale and need an easier tax system. Enter Section 44AD, a presumptive taxation scheme.
Section 44AD of the Income Tax Act offers tax concessions to specific individuals or professionals, exempting them from mandatory audits or showcasing their financial records.
Let us find out the subject's nitty-gritty and answer questions such as Section 44Ad in income tax, how 44ad of Income Tax Act applicability works, and the treatment of presumptive income under Section 44AD, etc.
Features of Section 44AD
One must understand the salient features of Section 44AD before one plans to use it.
So, the tax paid by the taxpayer/assessee under Section 44AD is calculated at 8 percent of the gross turnover (with a provision for 6% in scenarios involving digital transactions) for the financial year. But, this 8 percent (with a provision for 6% in scenarios involving digital transactions) is only if his/her/their gross turnover is below Rs 2 crore.
Do clearly note that the provisions of Section 44AD of the Income Tax Act apply to any business and profession, with the exception of those referred to in Section 44AE of the Income Tax Act.
Taxpayers should know that income calculated under Section 44AD of the Income Tax Act will be subject to taxes aligned with the slab rates prescribed.
If you are an assessee who claims deductions under this section, then you will not be allowed to claim any further expenses or any form of depreciation. The only exception to claiming further spending or depreciation is any interest or payments made to your partner(s).
Section 44 AD – Conditions
The Union Government of India has introduced the presumptive taxation scheme under section 44AD to alleviate the burden on small taxpayers. Thus, taxpayers engaged in businesses other than those related to plying, hiring, and leasing, as mentioned in Section 44AE of the Act, can avail the benefits of the presumptive taxation under Section 44AD.
The presumptive taxation scheme under Section 44AD aims to reduce the paperwork burden on small taxpayers.
What happens when you apply for presumptive taxation? An individual opting for the presumptive taxation scheme can report income at a set rate, freeing them from the obligations of maintaining account books and undergoing audits.
This benefit under Section 44 AD is available to resident individuals, Hindu Undivided Families (HUFs), and partnership firms, excluding Limited Liability Partnerships. However, to qualify, they must satisfy specific criteria:
- First, for individuals and firms seeking relief under Section 44 AD of the Income Tax Act, the annual gross turnover from the previous year should not exceed ₹2 crores.
- Second, presumptive income under Section 44AD is considered for relief at the prescribed tax rate if individuals or companies have not claimed tax deductions under Section 10A, 10B, 10AA, and 10BA during the tax assessment year.
- Third, you cannot claim any benefit under Section 44AD(4) of the Income Tax Act if you as an individual and company have claimed tax deductions under Section 80RRB and 80HH.
Apart from these 3 criteria, there are other conditions, too.
Companies or individuals cannot use section 44 AD of the Income Tax Act in hiring and plying goods carriage business. Similarly, firms or individuals running a brokerage or commission-based business cannot seek eligibility for 44AD of the Income Tax Act. Finally, individuals running an agency and those earning income from a profession as defined in Section 44AA (1) are not qualified.
Application of Section 44ADA
Section 44ADA of the Income Tax Act has some limitations. They are as follows.
- Firstly, the total gross income from a profession must be below Rs 50 lakh for a specific fiscal year.
- Secondly, if the professional income constitutes less than 50% of the gross receipts, the taxpayer is obligated to keep a book of accounts.
- Thirdly, if a taxpayer's total income exceeds the basic exemption threshold, they must maintain a book of accounts.
Section 44AD- Allowances and Disallowances
One needs to understand the nuances to make the best of 44AD of the Income Tax Act.
Let us first look at the disallowances of using Sec 44AD of the Income Tax Act.
Should you, as a taxpayer or assessee, opt to submit your returns under Section 44AD, be aware that you won't be eligible for deductions under Sections 30 to 38, which encompasses any type of depreciation.
It's important to decide whether or not to file returns under Section 44AD of the Income Tax Act when you're in the role of a taxpayer or assessee. Then, no disallowance is permitted as per Section 40, Section 40 A, and Section 43 B.
Now, here are the details about allowances under Section 44AD.
In case you are an assessee of a partnership firm, and the company chooses to log returns under Section 44AD, then more deductions can be claimed under Section 40 (B). This is related to any remuneration or interest paid to the partner(s) of the company/firm. However, this deduction has a certain limit under Section 40 (B)
Section 44AD- Lower and Higher Income Declaration
You, as a taxpayer or assessee, can declare any business income at a rate lower than 8 percent of the total turnover (with a provision for 6% in scenarios involving digital transactions) provided the income through the business is less than Rs 2 crore.
If you declare any business income at a rate lower than 8 percent of the total turnover (with a provision for 6% in scenarios involving digital transactions), but the total turnover over the financial year is more than the Rs 2 crore limit permitted under Section 44AD, then two things need to be done. Firstly, you are required to maintain account books in accordance with Section 44AA standards. Two, you will be required to have an audit performed on books of account as per the provisions of Section 44AB.
If the income earned by an assessee through their business exceeds the prescribed limit of Rs 2 crore as mentioned under Section 44AD of the Income Tax Act, then you will be required to declare the higher income. Please be aware that this income can be reported at a rate exceeding 8 percent (with a provision for 6% in scenarios involving digital transactions).
Section 44AD- Advance Tax
Advance tax refers to the income tax pre-paid based on the income generated within a specific fiscal year. If you as a taxpayer/assessee decide to file returns or claim deductions under Section 44AD, then there is good news on the advance tax front: you will not be required to pay any kind of tax in advance for income earned through the business mentioned under Section 44AD.
Nonetheless, if your income is derived from commissions, the rules for advance tax are applicable. In this case, if the commission surpasses the taxable threshold of Rs 10,000, you will need to pay advance tax.
Section 44AD- Written Down Value of Depreciable Assets
Depreciation refers to the decrease in the value of an asset over time. Those who submit tax returns under Section 44AD of the Income Tax Act are not eligible to claim any depreciation.
But there is a relief. This is regarding any asset used by any business that falls under those mentioned in Section 44AD. Then, the written down value of an aforementioned asset will be calculated in a way wherein the depreciation of the asset is allowed and claimed as per Section 32 norms.
Section 44ADA- Professionals:
Section 44AD applicability is relevant for professionals, too, such as lawyers, doctors, technical consultants, architects, interior decorators, engineers, and chartered accountants.
Any professional taxpayer or assessee can claim deductions and benefits under Section 44ADA. To be eligible, the professional's total income over the course of the financial year has to be equal to or less than Rs 50 lakh.
Another point to note for professionals is that if they claim deductions under this section, their taxable income is assumed to be 50% of the total revenue for that fiscal year. So, do the tax calculations based on these norms.
FAQs on Section 44AD
What are the conditions for 44AD?
For individuals and firms, the yearly gross turnover must not exceed ₹2 crores from the preceding year. Eligibility extends to those individuals or firms that haven't availed tax deductions under Sections 10A, 10B, 10AA, and 10BA for the assessment year. Furthermore, individuals and firms qualify if they haven't taken tax deductions under Sections 80RRB and 80HH.
Who is not eligible for Section 44AD?
To seek relief under Section 44AD of the Income Tax Act, companies or individuals in hiring and plying goods carriages business are not eligible. Also, firms or individuals operating or running a brokerage, commission-based business, or agency are not eligible. Lastly, taxpayers earning from a profession under Section 44 AA (1) are not eligible
Who is eligible for presumptive income?
For any professional wanting to claim deductions under section 44ADA, the taxable income will be presumed to be 50 percent of total receipts for the financial year.
What is the minimum turnover for an audit?
Under Section 44AD, the income is assumed to be 8% (with a provision for 6% in scenarios involving digital transactions) of the assessee's entire turnover if the turnover is less than Rs 2 crore. If the turnover exceeds Rs 2 crore, income calculation follows standard provisions, and the assessee must have their accounts audited as per Section 44AB.
How do I calculate 44AD income?
Section 44AD introduces a presumptive taxation method. The income is determined at 8% of the turnover (with a provision for 6% in scenarios involving digital transactions), allowing taxpayers the benefit of not having to maintain detailed account books.
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