Section 44AD of the Income Tax Act outlines the presumptive taxation scheme for businesses in India. It is one of the most important sections that allows for significant tax savings for small taxpayers such as freelancers, as they don’t have to maintain books of accounts to be furnished when filing taxes. The Income Tax Act of 1961 includes all the information about taxes and deductions that directly affect taxpayers in India. However, the Indian government makes regular amendments and introduces new sections to ensure the taxation system remains fair to every type of taxpayer.
Section 44AD and section 44ADA are crucial for small businesses and freelancers when filing taxes. This blog will help you learn everything about section 44AD of the Income Tax Act and one of its essential parts, section 44ADA.
What is section 44AD of Income Tax Act?
Section 44AD provides relief to small taxpayers engaged in business activities, with certain exceptions. These exceptions include businesses involving the plying, hiring, or leasing of goods carriages as specified under Section 44AE and individuals conducting agency businesses. This scheme simplifies taxation for eligible businesses, promoting compliance while excluding specialised or agency-related operations. Presumptive taxation refers to a scheme allowing small taxpayers to pay tax on presumed income rather than calculating all the expenses and deducting them from the annual income. Section 44AD is a presumptive taxation scheme that allows taxpayers to pay tax on a presumed percentage of their annual turnover given that the annual turnover is less than Rs. 2 crores (Rs. 3 crores if 95% of receipts are through online modes).
The presumptive taxation scheme has helped small taxpayers, such as freelancers, to avoid spending time maintaining extensive books of record. Furthermore, under section 44AD of the Income Tax Act, taxpayers are not obligated to get their books of record audited.
Taxpayers operating any type of business other than hiring, plying, and leasing listed under section 44AE can utilise the presumptive taxation scheme to pay taxes on presumptive income without maintaining and auditing the books of records.
Another sub-section within section 44AD is section 44ADA, which applies to professionals such as freelancers, lawyers, doctors, etc., with an annual turnover limit of Rs. 50 lakh (Rs. 75 lakh if 95% of receipts are through online modes).
Characteristics of section 44AD
Here are the features and characteristics of section 44AD of the Income Tax Act of 1961:
- The tax under section 44AD of the Income Tax Act is calculated at 8% of the total gross turnover (or 6% for digital transactions) provided that the annual turnover is below Rs. 2 crores (Rs. 3 crores if 95% of receipts are through online modes).
- Income calculated under the presumptive provisions of section 44AD is liable for tax as per the taxpayer’s income tax slab rate.
- A taxpayer filing taxes under the provisions of section 44AD of the Income Tax Act can not claim any other expense or depreciation. However, they can claim payments made to partners and interest.
- The provisions of section 44AD apply to every business or profession except those listed under section 44AE of the Income Tax Act of 1961.
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Features of Section 44AD
Section 44AD of the Income Tax Act simplifies tax filing for small businesses, reducing compliance burdens. Here are its key features:
- Eligibility: Section 44AD is applicable to resident individuals, Hindu Undivided Families (HUF), and partnerships (excluding LLPs) engaged in any business, except for specific excluded professions such as legal, medical, engineering, or accounting services.
- Turnover limit: Businesses with a gross turnover or receipts of up to Rs. 2 crore can opt for this scheme.
- Presumptive income: Under this scheme, 8% of the total turnover or gross receipts is presumed as taxable income. For digital transactions, the presumptive rate is reduced to 6%.
- No expense deductions: Businesses cannot claim any further deductions or expenses beyond the presumptive income.
- No audit requirement: Businesses opting for Section 44AD are not required to maintain detailed books of accounts or get audited, simplifying the compliance process.
- Tenure requirement: If a business opts for the scheme, it must continue for five consecutive years.
Objectives of a presumptive taxation system
Section 44AD, a component of the presumptive taxation system, is designed to achieve the following objectives:
- Streamlined compliance: To simplify the tax filing process for small taxpayers by reducing the administrative burden associated with maintaining detailed financial records and undergoing audits.
- Expanded tax base: To encourage a greater number of small businesses and freelancers to comply with tax regulations by offering a simplified and less burdensome tax regime.
- Efficient tax administration: To optimize the allocation of tax administration resources by minimizing the need for extensive scrutiny of financial records, enabling a focus on larger-scale tax evasion cases.
- Cost reduction for taxpayers: To reduce the costs incurred by small taxpayers on accounting and auditing services, allowing them to allocate resources more effectively.
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Who is eligible for section 44AD?
Here are the individuals and entities that are eligible for filing taxes under the provisions of section 44AD of the Income Tax Act:
- Any individual resident of India
- Resident Hindu Undivided Families (HUFs)
- Resident partnership firms apart from Limited Liability Partnership Firms (LLPs)
Although these individuals and entities are eligible for filing taxes under the presumptive taxation scheme of section 44AD of the Income Tax Act, they must have an annual turnover lower than Rs. 2 crores (Rs. 3 crores if 95% of receipts are through online modes). If the annual turnover exceeds this limit, they become ineligible for section 44AD.
Budget 2023 updates about section 44AD and section 44ADA
In the Budget 2023, the Indian government amended section 44AD and section 44ADA to revise the presumptive taxation scheme. The main amendment was for the annual turnover limits for FY 2023-24 (AY 2024-25). The updates are as follows:
| Category | Previous annual turnover limit | Revised annual turnover limit |
| Section 44AD: For small businesses | Rs. 2 crores | Rs. 3 crores |
| Section 44ADA: For professionals such as freelancers, lawyers, doctors, etc. | Rs. 50 lakh | Rs. 75 lakh |
Note: The revised annual turnover limits of Rs. 3 crores under section 44AD and Rs. 75 lakh under section 44ADA are subject to the condition that 95% of the total receipts are through online modes.
Also read about: Difference Between Income Tax Act and Direct Tax Code
Application of section 44AD
Here is everything you must know about the application of section 44AD of the Income Tax Act of 1961:
Businesses
The rules and provisions of section 44AD apply to all businesses with residency in India other than those involved in plying, leasing, and renting products. This is because such businesses are restricted under the provisions of section 44AE, which disallows claiming deductions under section 44AD.
Rate
Any business or taxpayer opting to file taxes under the provisions of section 44AD can do so at the rate of 8% (6% for digital transactions). However, if the business or the taxpayer chooses not to file the ITR under this section and has an annual turnover lower than 8% of the total returns, it is required to keep the book of records and have them audited by a Chartered Accountant.
Applicability
The provisions of section 44AD are not applicable to professions listed under section 44AA. Furthermore, taxpayers who earn through broker agreements or commissions can not claim deductions under section 44AD. Individual residents, HUFs, and partnership firms other than LLPs can claim deductions under this section.
Here is a detailed table for understanding the applicability of section 44AD of the Income Tax Act:
| Aspect | Provisions |
| Allowances and disallowances |
|
| Advance tax |
|
| Depreciation assets |
|
| Professionals |
|
Also read about: What is dearness allowance
Who is ineligible for the presumptive taxation scheme (Section 44AD)?
Certain types of income and businesses are explicitly excluded from the benefits of Section 44AD. These include:
- Commission and brokerage income: Businesses primarily earning income from commissions or brokerage, such as insurance agents or brokers, are ineligible.
- Professional services: Professionals listed under Section 44AA(1), including accountants, lawyers, doctors, engineers, architects, interior designers, technical consultants, and other notified professions, cannot opt for this scheme.
- Agency businesses: Businesses operating as agents for the delivery of services or products, often involving complex revenue models, are not eligible.
Benefits of the presumptive taxation scheme (Section 44AD)
The Presumptive Taxation Scheme offers several advantages to small businesses and freelancers:
1. Simplified tax compliance:
- Reduced record-keeping: No need to maintain detailed books of accounts.
- Simplified tax filing: Income is calculated as a percentage of turnover (6% for digital receipts and 8% for cash receipts), eliminating the need for complex profit and loss statements.
2. Lower compliance costs:
- Reduced accounting costs: Less need for professional accounting services and software.
- Time savings: Reduced time spent on record-keeping and tax compliance.
3. Tax benefits and deductions:
- Presumed expenses: A portion of turnover is automatically considered as expenses, potentially reducing taxable income.
- Exemption from advance tax penalties: Under certain conditions, penalties for non-payment of advance tax may be waived.
- Continuity benefit: Continuous use of the scheme for five years may shield the taxpayer from scrutiny during that period.
Also read about: What is an inheritance tax
How to check tax liability under section 44AD of the Income Tax Act?
If you are a taxpayer or a business entity and want to file taxes under section 44AD of the Income Tax Act, your income will be computed as 8% of the annual turnover for cash receipts and 6% in the case of digital receipts.
Here is an example for a better understanding:
Let's say you are a small business owner with the following annual turnover:
- Total turnover (sales) for the financial year: Rs. 50,00,000
- Out of this, Rs. 30,00,000 was received through cash transactions.
- Rs. 20,00,000 was received through digital transactions.
Tax calculation:
- Income from cash transactions: 8% of Rs. 30,00,000 = 0.08 * 30,00,000 = Rs. 2,40,000.
- Income from digital transactions: 6% of Rs. 20,00,000 = 0.06 x 20,00,000 = Rs. 1,20,000.
Total income to be declared under section 44AD:
- Rs. 2,40,000 (cash transactions) + Rs. 1,20,000 (digital transactions) = Rs. 3,60,000.
Hence, if you are filing taxes under section 44AD, your taxable income will be Rs. 3,60,000.
Understanding income calculation and presumptive tax rates under Section 44AD
Section 44AD offers a simplified approach to income tax calculation for eligible small businesses. Here’s a breakdown of how income is calculated and the applicable presumptive tax rates:
- Presumptive income calculation:
Under Section 44AD, taxable income is presumed to be a percentage of the total turnover or gross receipts of the business. No detailed accounting is required. This scheme aims to reduce the burden of maintaining extensive records for small businesses. - Presumptive rate for cash transactions:
For businesses conducting transactions primarily in cash, 8% of the total turnover or gross receipts is treated as taxable income. - Presumptive rate for digital transactions:
To encourage digital payments, a reduced presumptive rate of 6% applies to income from turnover or gross receipts received through banking channels or digital payments. - No further deductions allowed:
The income calculated under this section is final, and no additional deductions for expenses such as rent, utilities, or salaries can be claimed. - Advance tax payment:
Taxpayers under Section 44AD are required to pay the entire advance tax by March 15 of the financial year. There is no need for quarterly advance tax installments. - Opting out of the scheme:
If a business opts for Section 44AD and later decides to opt out, it cannot re-enter the scheme for five consecutive assessment years.
Note:
Businesses with a turnover exceeding Rs. 2 crore are not eligible for Section 44AD and must file taxes under regular provisions.
Example:
If a business has a turnover of Rs. 50 lakh, the presumptive taxable income would be:
For cash transactions: Rs. 50 lakh x 8% = Rs. 4 lakh
For digital transactions: Rs. 50 lakh x 6% = Rs. 3 lakh
Features of presumptive taxation under Section 44AD
The presumptive taxation scheme under Section 44AD provides a simplified tax filing process for small businesses, reducing the need for maintaining detailed books of accounts and simplifying compliance. Key features include:
- Applicable to small businesses:
Section 44AD applies to resident individuals, Hindu Undivided Families (HUFs), and partnerships (excluding LLPs) engaged in eligible businesses with a turnover of up to ₹2 crore. - Presumptive income:
Taxable income is presumed to be 8% of gross receipts or turnover for cash transactions, while a reduced rate of 6% is applied to digital payments. - No detailed accounting required:
Businesses that opt for the presumptive taxation scheme do not need to maintain detailed books of accounts or undergo an audit, significantly reducing compliance burdens. - No deduction of expenses:
Under this scheme, businesses cannot claim further deductions for expenses such as rent, utilities, or salaries, as the presumptive income is final. - Advance tax:
Taxpayers under Section 44AD need to pay the entire advance tax by March 15 of the financial year, eliminating the requirement for quarterly payments. - Five-year rule:
Once opted into the scheme, a business must follow it for five consecutive years. If they opt out, they are barred from rejoining the scheme for the next five years.
What are taxable profits and gains?
Taxable profits and gains refer to the income a business or individual earns that is subject to taxation. This includes profits from business activities, investments, or the sale of assets. For businesses, taxable profits are typically the net income after deducting allowable expenses from gross revenue.
These profits are taxed based on applicable tax rates under the Income Tax Act. Gains also encompass capital gains from selling property, stocks, or other assets, which are taxed under specific rules depending on the holding period and type of asset.
Conclusion
Section 44AD and its subsection 44ADA are crucial and beneficial for individuals, businesses, and professionals to avoid maintaining books of records and getting them audited while filing taxes. These sections have simplified the taxation process and allowed eligible taxpayers to pay taxes at a significantly lower income, saving taxes and increasing their overall savings. If you are looking to file taxes under section 44AD or section 44ADA, you can analyse your eligibility and ensure that you understand all the provisions of the section.
