Section 44AD – Check Features & Applications of Section 44AD

Tax audits and ITR filling is a compliance that every taxpayer has to go through. It can be a hectic process and might require a lot of resources hence, the government in the Income Tax Act made special provisions to provide tax relief to certain professions under Section 44AD.

The burden of compliance forces some people to not pay the taxes which poses a huge loss to the country hence, a more lucrative and practical approach is taken to provide a scheme of Presumptive Taxation that is very easy to understand and comply with.

Presumptive Taxation is a method of taxation wherein the profits of a business in presuming to be a certain percentage of the turnover of the business. The following are the taxation that the business and profession have to pay as a tax-

Check Features & Applications of Section 44AD
ParticularsSection applicablePresumed Profits (as a percentage of Turnover)
BusinessSection 44AD8%
ProfessionSection 44ADA50%

In this article, we will discuss in detail Section 44AD, Check Features & Applications of Section 44AD, etc.

Section 44AD of the Income Tax Act

The income Tax Act has various sections to provide detailed information related to taxation. One such section is Section 44AD which a section explains how small taxpayers must have compliance with the tax payment.

Small taxpayers might see the payment of the tax as a tedious job of maintaining the account book and keeping it updated in an Account book.

But, under this section, the businesses and professions under this scheme are not required to maintain the books and will be charged a presumable taxation percentage out of the turnover.

The following are the professions where the above scheme cannot be availed-

  • Architectural
  • Accountancy
  • Medical
  • Engineering
  • Technical consultancy
  • Interior decoration

Section 44AD: Income presumed to be 8% of turnover

In this section 33AD, the income of an individual less than 2 Cr will be charged 8% of the income tax as a fixed rate. for more than 2 Cr, the nominal provision of the income tax will be applicable.

Also, any deduction from 30 to 38 will not be applicable for any deduction as all the deductions are fully given and no further deduction will not be allowed.

The Finance Act was amended and added a few other important amendments which are as follows-

  • The Salary/ Remuneration/ Interest paid to partners will not be allowed to be claimed as a deduction
  • The businesses claiming the benefit of Section 44AD will be required to comply with the provisions of the Advance Tax. But, to keep complaisance at a minimum, you can pay 100% of the tax applicable by 15 March of the financial year then the provision of Advance tax will not apply to you
  • If the business receives the payment digitally, the business can claim the applicable tax to be 6% instead of 8%. To promote the digital transaction, the government has incentivized digital payment for the business  

What is Advance Tax?

Traditionally, taxes are paid at the end of the financial year for that particular year but, if the tax amount to be paid is more than Rs.10,000/- then you’ll have to pay the taxes in installments.

Rather than paying the tax amount at the end of the year, you’ll have to pay the tax as you go. This tax applicable is known as the Advance Tax.

Who is Eligible for Section 44AD?

The followings are the business or individuals who can apply section 44AD while paying tax-

  • Section 44AD applies to all businesses except the business of plying, hiring, or leasing goods
  • Section 44AD does not apply to the agency business, business earning income from commission or brokerage
  • Section 44AD mentions the word business hence, professionals won’t be covered
  • Residents in India who are Individuals, Partnership & HUF can claim taxation under the Section 44AD.
  • NRIs cannot claim the benefits of this scheme also the Limited Liability Partnerships cannot claim taxation under this scheme

Opting in or out of Section 44AD for Businesses

Any person eligible to avail of the benefits of section 44D can opt in or out of the scheme. However, if the person opts out of the scheme of Section 44AD then the person cannot avail of the benefits of the scheme for the next 5 years.

Other Relevant Points regarding Section 44AD

The following are the other relevant points regarding Section 44AD which you’ll have to take into consideration-

  • If the person has more than 1 business then the total turnover of all the businesses should be taken into account
  • In case, the person is involved in the business as well as the profession then the taxation of income earned from the business will be as per Section 44AD and the income earned from the profession will be computed using normal provisions.

Section 44ADA: Presumptive Taxation @ 50% for Professionals

Professionals can now take advantage of presumptive taxation. If the professionals whose total Gross Receipts do not exceed more than Rs.50 Lakhs in a financial year can claim this benefit.

The income of any person making use of the section would be assumed to be 50% of the total Gross Receipts of the year. Under this scheme, no deduction other than a deduction under sections 30 to 38 will be allowed.

The following are the professionals who can make use of the section-

  • Legal
  • Medical
  • Engineering
  • Architectural Profession
  • Profession of Accountancy
  • Technical Consultancy
  • Interior Decoration

in case, the professionals use this scheme then they professional do not need to be required to maintain books of accounts or get the account audited by the chartered accountant.

But, in case, the profits and gains of the professional are lower than the 50% mark then the professional must prepare the Books of Accounts under section 44AA to maintain receipts of all the expenses and get the account audited.

Opting in and out of Section 44ADA

The professional has the flexibility to opt in or out without having to follow the restriction of a business of 5 years.