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You may benefit from Section 44AD of the Income Tax Act if you are a small business owner or assessor. Section 44AD of the income tax act exempts you from having to undergo an audit or show your books. If your occupation comes under Section 44AA, you are not eligible for this section.

To reduce the tax burden on small taxpayers or assessees, the income tax department enacts section 44AD provision. It is a presumptive taxation provision. 

If you come under this plan, you don’t need to keep or display books of account, nor do you require them to be audited. The scheme tries to relieve small-time assessees who run any company except those listed in Section 44AE.

Let us know more about section 44AD of the income tax act.

What Is the Rule of 44AD of the Income Tax Act?

Section 44AD of the Income Tax Act provides relief for small taxpayers from audits and books of account. The basic rules for section 44AD are

  1. Calculate your tax under section 44AD at 8% of your gross turnover, provided your gross sales are less than Rs 1 Crore. 
  1. In the case of digital transactions, the tax rate reduces to 6% to support the digital mode of transactions. Digital transactions include Credit cards, Debit cards, online net banking, UPI Payments, etc.
  1. Your income calculated under this provision is liable to taxation by the Income Tax Act’s slab rates.
  1. If you claim deductions under this provision, you would not be able to claim any further expense or depreciation, except interest or payments paid to partners.
  1. The provisions of this section apply to any business or profession except those listed in Section 44AE.

You can claim returns under this section if you satisfy these rules.

Who Is Eligible for 44AD?

You are eligible to use the conditions of Section 44AD’s presumptive taxation plan if you are

  1. Resident Individual taxpayer
  2. Partnership Firm
  3. Hindu Undivided Family
  4. You are involved in any business except plying, hiring, or leasing goods carriages.
  5. You are in professional services.
  6. You have not claimed deduction under sections 10A, 10AA, 10B, 10BA or under sections 80HH to 80RRB during an assessment year

You may satisfy the above conditions to execute a presumptive taxation scheme under Section 44AD of the Income Tax Act. Also, your previous year’s gross receipts or annual turnover should not have exceeded Rs. 2 crores.

If you satisfy all the above conditions, you can claim returns under section 44AD.

What Is the Benefit of 44AD?

Section 44AD of the income tax act helps small business owners and taxpayers free from auditing their accounts or the necessity to keep books. It gives relief to small taxpayers.

Their taxation process will now take place without hustle under section 44AD of the income tax act.

Is an Audit Required for 44AD?

If you are eligible for Section 44AD and file a return under this section, you may not be required to audit your account or keep a book of records. Your taxation process simply takes place.

However, you will require an audit as soon as your turnover exceeds Rs.1 Crore.

Is 44AD Mandatory or Optional?

Section 44AD covers special provisions for computing profits on a presumptive basis. This section 44AD is optional. 

However, you must be aware that if you didn’t opt for this section, you must have all your accounts audited and have your books of accounts ready while filing returns.

Can We Show More than 8% Profit in 44AD?

In Section 44AD, you must declare a minimum of 8% of the Gross turnover or gross receipts as his considered revenue. However, Section 44AD(1) further gives the option to claim more than 8% in your return of income.

How Do You Calculate 44AD Turnover?

In presumptive taxation, you should calculate your income according to the 8% turnover or 6% for digital payments and receipts. 

Here is an example for complete understanding.

Considering the value of Mr. A’s business is ₹ 90 lakhs in the last year. If he opts for presumptive taxation under Section 44AD, his income comes at 8% of his turnover, that is, ₹ 7.2 lakhs. Therefore, the annual presumptive tax of Mr. A will come according to the ₹ 7.2 lakhs income slab.

Can We File Loss in 44AD?

In the case of losses, as there is no revenue, the maximum sum not taxable does not exceed, and you are not required to audit the accounts under section 44AB.

What Is the Difference between 44AD and 44ADA?

PointsSection 44ADSection 44ADA
Deemed Minimum Income8% of sales in cash 6% of gross receipts other than cash50% of the value of receipts
ApplicabilityA Resident-individual,-HUF and-partnership firm (not LLP)
Engaged in any business and have not claimed deductions u/s 10A/10AA/10B/10BA or 80HH to 80RRB for the relevant year.
Person in a particular profession like:
1. Legal;
2. Medical;
3. Engineering or architectural;
4. Accountancy;
5. Technical consultancy;
6. Interior decoration;
ConditionTotal revenue or gross income from the business does not exceed Rs. 2 croresThe total gross receipt does not exceed Rs. 50 lakh
Not Applicable to1. Business of plying, hiring, or leasing of goods carriages referred to in section 44AE;2. A person who is carrying on any agency business;3.The person who is earning income in the nature of commission or brokerage;4. A person engaged in any profession as prescribed u/s 44AA (1).Other than a specified profession

What Are the Conditions for Deductions and Allowances under Section 44AD?

Section 44AD comes with certain deductions and allowances. They are

  1. Permissible deductions under Sections 30 to 38 provisions are provided already. Thus, you cannot claim any deductions further under the same possibilities.
  1. Section 44AD provisions do not permit you to file a deduction on interest account and salary paid to your partners.
  1. You are not allowed any disallowances according to Sections 40, 40A, and 43B.

Apart from these, according to the new conditions, the limitation that taxpayers cannot opt for presumptive taxation under Section 44AD of the Income Tax Act for 5 years only applies if they show evidence that the profits are below 6% or 8%. If you do not consider the presumptive income scheme, the deductions under Section 44AD(4) of the Income Tax Act do not apply.

Bottomline

Section 44AD of the Income Tax Act helps small business owners and assesses by exempting them from audits of their accounts or keeping profit/loss books. To reduce your tax burden, section 44AD of the income tax act exempts you from having to undergo an audit or show your books. You can file your returns under this section only if your gross profit is at 8% of your gross income. However, if your occupation comes under Section 44AA, you are not eligible for this section. Utilize section 44AD and ease the process of filing your tax returns.

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