Section 44AD of the Income Tax Act for AY 2023-24

Income tax regulations play a crucial role in governing the taxation landscape for businesses and individuals. The Income Tax Act in India provides various provisions for small businesses to simplify the tax compliance process.

Key takeaways

Businesses must fulfill certain eligibility criteria to benefit from the Presumptive Taxation Scheme under Section 44AD.

• Under Section 44AD, eligible businesses can declare their income at a prescribed rate of 8% of the total turnover or gross receipts.
• Section 44AD provides a simplified income declaration process for eligible taxpayers.
• Section 44AD simplifies the computation of depreciation by excluding the need for complex WDV calculations.
• If the income from a profession is less than 50% of the gross receipts, the taxpayer must maintain a book of accounts.

Meaning of Section 44AD

Section 44AD of the Income Tax Act 1961 primarily targets small businesses and professionals to streamline the tax calculation process. It allows eligible taxpayers to declare their income at a prescribed rate without extensive record-keeping and documentation. This provision aims to reduce the compliance burden on small taxpayers and encourage entrepreneurship.

The following taxpayers may opt for this scheme:

• Resident partnership firms, which exclude Limited Liability Partnerships (LLP)
• Resident individuals
• Resident Hindu Undivided Family (HUF)

The scheme is not available for non-resident taxpayers. Additionally, any assesses who claim income tax deductions under sections 10A, 10AA, 10B, and 10BA or under sections 80HH and 80RRB are not eligible for this scheme.

Eligibility to Get the Advantages of Presumptive Taxation Strategy under Section 44AD

Businesses must fulfil certain eligibility criteria to benefit from the Presumptive Taxation Scheme under Section 44AD. The key points to consider are:

• The annual gross turnover should not be more than ₹2 crores in the previous year for individuals and firms.
• Individuals or firms are eligible if they have not claimed a tax deduction under Section 10A, 10B, 10AA, and 10BA during the assessment year.
• Individuals and firms are eligible if they have not claimed tax deductions under Section 80RRB and 80HH.

Application of Section 44AD

Some of the multifaceted applications of Section 44AD focus on allowances, disallowances, income declaration, advance tax, depreciated assets, and professionals:

Allowances and Disallowances

Under Section 44AD, eligible businesses can declare their income at a prescribed rate of 8% of the total turnover or gross receipts. However, specific allowances and disallowances must be considered. While the deemed income covers most expenses, it does not account for deductions under Sections 30 to 38, which include expenses related to rent, repairs, depreciation, and employee wages. Taxpayers should carefully review these provisions to determine the extent of allowances and disallowances applicable to their situation.

Lower and Higher Income Declaration

Section 44AD provides a simplified income declaration process for eligible taxpayers. However, it is crucial to assess whether the deemed income aligns with the actual financial performance of the business. Taxpayers can declare a lower income than the prescribed percentage, which may attract scrutiny from tax authorities. On the other hand, declaring a higher income voluntarily may lead to increased tax liability. Striking the right balance between accuracy and optimization is essential for taxpayers opting for the presumptive taxation scheme.

Advance Tax and Section 44AD

One of the advantages of Section 44AD is the ease of advance tax payment. Taxpayers under this section are not required to pay advance tax in instalments as per the regular schedule. Instead, they can make a lump-sum payment of the entire tax liability by March 15 of the financial year. This simplifies the compliance process for small businesses and professionals, providing them with more flexibility in managing their cash flows.

Depreciable Assets and Written Down Value

The Written Down Value (WDV) concept is crucial for businesses dealing with depreciable assets. Section 44AD simplifies the computation of depreciation by excluding the need for complex WDV calculations. Taxpayers can claim depreciation on assets at the rate prescribed under the Income Tax Rules, making it easier to factor in this essential component without the need for detailed record-keeping.

Professionals under Section 44AD

Apart from businesses, Section 44AD extends its benefits to professionals as well. Eligible professionals, such as doctors, lawyers, and architects, can opt for the presumptive taxation scheme and declare their income at the prescribed rate of 50% of the gross receipts. This provision significantly simplifies the tax compliance process for professionals, allowing them to focus more on their practice and less on intricate accounting procedures.

Section 44AD – Conditions

Here are some conditions under section 44AD of the Income Tax Act:

• Firms or individuals hiring and plying goods carriages are not eligible.
• Firms or individuals running a brokerage or commission-based business are not eligible.
• Individuals running an agency are not eligible.

Taxpayers earning from a profession under Section 44AA (1) are not eligible.

Businesses Excluded from Section 44AD

Small business owners engaged in ventures excluding the following may claim relief under this section:

• An individual who earns brokerage or commission
• Businesses leased, plying, or hired goods carriages as specified under section 44E
• A person engaged in any agency
• Insurance agents earning income through commissions cannot adopt the PTS
• Any business with an annual income exceeding ₹20 crores is not eligible for availing of the benefits under the PTS

Section 44ADA limits

Here are some limitations of section 44 of the Income Tax Act:

• Total gross earnings from a profession should be less than ₹50 lakhs for a given financial year.
• If the income from a profession is less than 50% of the gross receipts, the taxpayer must maintain a book of accounts.
• If the taxpayer’s total income exceeds the basic exemption limit, the taxpayer must maintain a book of accounts.

Tax feature of Section 44AD strategy

Here are the features of this strategy:

• 8% of the annual gross turnover of a business is considered the presumptive income for the current assessment year.
• The annual turnover should be less than ₹2 crores.
• Individuals and firms can use the presumptive income as their net income for the current year.
• Taxpayers cannot claim a deduction under Section 38 or 30 if they choose Section 44AD.

Computation of business income

The usual way to compute business income is as follows:

Taxable business income = Gross turnover from business operations – business-related expenses

The business income is declared at 8% of the total gross turnover during the year. If your receipts exist in digital (non-cash) format, only 6% of them constitute your net income, and you are required to pay taxes on this income. There is no obligation to maintain accounting records in this case. The gross turnover includes revenues through account payee checks, bank drafts, or the electronic clearing system.

Therefore, when a business adopts the presumptive taxation scheme, total taxable income is calculated at 6% or 8% based on the gross turnover. However, a business owner may voluntarily disclose a higher income if required.

Under the standard guidelines of the Income Tax Act, the total taxable income from business operations is calculated after deducting the allowable expenses and disallowing expenses that are not by the act.

However, when the assesses adopts this scheme, there is no provision for allowing or disallowing any business-related expenses. The taxable income is capped at the prescribed rate of the total gross turnover. Moreover, when this scheme is adopted, there is no additional provision for depreciation.

Advance Tax Payment Provision

All assesses who adopt the PTS must pay the entire advance tax liability on or before March 15 of the previous year. If such advance tax is not paid, interest per section 234C is levied.

Opting in and out of Section 44AD

Taxpayers can opt for the presumptive tax scheme in any assessment year. Taxpayers can also opt out as per their choice. However, once opted out, taxpayers cannot choose the scheme for the next 5 years.

Assesses that opt for this scheme must follow it for at least five years. This scheme becomes unavailable to them for the next five years if this provision is not met. An ideal section 44AD example could be to assume that an individual adopts the scheme for the assessment year 2017–18. They continue adopting the presumptive taxation scheme for the next two years, i.e., 2018 -19 and 2019–20.

However, they did not adopt this scheme the following year, 2020–21. Therefore, they cannot claim the benefits under this section for the next five years, i.e., for assessment years 2021–22 until 2025 –26. During this period, they will have to maintain their accounts and get these audit limits for AY 2021-22 as per the provision of the Income Tax Act.

Other Relevant Points Regarding Section 44AD

Here are some crucial points to keep in mind:

• In the case of more than one business, tax is calculated on the total turnover of all the businesses combined.
• In the case of income from businesses and professions, the income from businesses can be considered to avail the benefits of Section 44AD. However, the income from the profession is taxed as ordinary income under prevailing income tax slabs.
• Taxpayers who opt for the benefits under Section 44AD need to use ITR Form 4 to file their income tax returns.
• Taxpayers can claim tax benefits under Chapter VI-1 along with the benefits of the presumptive tax scheme under Section 44AD.

Declaring Lower Income or Higher Income under the Presumptive Taxation Scheme

Declaring lower income:

• If a taxpayer’s total turnover exceeds the declared presumptive income or 8% of the previous year’s turnover, the taxpayer must maintain a book of accounts under Section 44 AA.
• The book of accounts should be audited per section 44 AB limit for AY 2021-22. Declaring higher income.
• A taxpayer can declare a higher income than the presumptive income or 8% of the previous year’s turnover.
• No book of accounts has to be maintained in this case.

Wrapping Up

Every firm must keep track of its profit and loss statements, official books of accounts, and other records used to determine its tax obligations. However, they are now provided with an exemption from reviewing the book of accounts and are required to pay a rate set by the slabs under the Presumptive Taxation Scheme, thanks to the establishment of Section 44AD of the Income Tax Act.

Section 44AD is a presumptive taxation scheme under which income is estimated based on 8% of sales (or 6% in the case of digital receipts and payments), and the taxpayer is given a break if the account books are not kept up to date.

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