Section 44AD of the Income Tax Act offers a simplified presumptive taxation scheme designed to ease tax compliance for small businesses. This scheme allows eligible taxpayers—primarily individuals, Hindu Undivided Families (HUFs), and partnerships (excluding LLPs)—to declare income at a prescribed rate of 6% or 8% of their gross turnover or receipts, eliminating the need for maintaining detailed books of accounts and undergoing tax audits. However, specific conditions and restrictions apply, such as a turnover cap of ₹3 crore and adherence to Section 44AD(4) for continued eligibility. Taxpayers must also consider advance tax payment obligations under this scheme. While Section 44AD caters to businesses, Section 44ADA focuses on professionals, with notable differences between the two. Recent updates in Budget 2023 have brought significant changes to the presumptive taxation schemes, including enhanced limits and compliance norms. In this blog, we’ll explore all aspects of Section 44AD, from eligibility and conditions to key differences with Section 44ADA, along with FAQs to address common queries.
Latest Update
The Union Budget 2023 introduced key changes to presumptive taxation schemes under Section 44AD and Section 44ADA, aimed at promoting digital transactions and providing relief to small businesses and professionals. The changes are applicable from the Assessment Year 2024-25 (Financial Year 2023-24). Below are the updates:
Enhanced Turnover Limit for Section 44AD: The threshold for gross turnover or receipts under Section 44AD was increased from ₹2 crore to ₹3 crore, provided at least 95% of the turnover or receipts are through digital modes of payment.
Enhanced Gross Receipts Limit for Section 44ADA: For professionals covered under Section 44ADA, the gross receipts threshold was increased from ₹50 lakh to ₹75 lakh, again subject to the condition that at least 95% of the receipts are through digital transactions.
What is Section 44AD?
Section 44AD of the Income Tax Act provides a simplified taxation scheme, primarily aimed at small businesses to reduce the burden of tax compliance. Under this presumptive tax scheme, eligible taxpayers can declare their income as 6% or 8% of their gross turnover, depending on whether the transactions are digital or in cash. By opting for this scheme, businesses are exempt from maintaining detailed books of accounts and undergoing a tax audit, making compliance easier and cost-effective. However, the scheme is only available for businesses with a gross turnover or gross receipts not exceeding ₹2 crore (enhanced to ₹3 crore, as per Budget 2023, subject to digital receipt thresholds). Income calculated under this provision is liable to taxation in accordance with the Income Tax Act’s slab rates.The presumptive scheme under Section 44AD is a popular choice for small businesses to simplify their taxation process and focus on growth.
Who is Eligible for Presumptive Taxation Under Section 44AD?
The presumptive taxation scheme under Section 44AD is available to specific categories of taxpayers engaged in eligible businesses. Individuals, Hindu Undivided Families (HUFs), and partnership firms (excluding LLPs) all of whom are resident can opt for this scheme, provided their gross turnover or gross receipts do not exceed ₹2 crore. However, professionals, limited liability partnerships (LLPs), and companies are explicitly excluded from availing of this scheme. The scheme is suitable for businesses such as trading, manufacturing, and retail but does not apply to income derived from commission, brokerage, or other excluded activities. It is specifically designed to benefit micro and small enterprises by simplifying their tax compliance process.
Conditions for Section 44AD
To opt for the presumptive taxation scheme under Section 44AD, taxpayers must adhere to certain conditions:
- Turnover Limit: The gross turnover or gross receipts of the business should not exceed ₹2 crore or ₹3 crore (as per Budget 2023, applicable for businesses with at least 95% digital receipts).
- Applicable Businesses: The scheme is only applicable to eligible businesses, excluding professions covered under Section 44ADA, commission or brokerage businesses, or those involved in agency work.
- Declaration of Income: Taxpayers must declare income at 6% of digital transactions and 8% of cash transactions.
- Continuity Clause: If a taxpayer opts out of the presumptive scheme after availing it, they cannot re-enter the scheme for five consecutive assessment years, as per Section 44AD(4).
- No Deductions for Expenses: Under this scheme, taxpayers cannot claim additional deductions for business expenses, as the income is presumed to be a percentage of turnover.
- Advance Tax: Taxpayers opting for Section 44AD need to pay the entire advance tax liability by March 15 of the financial year.
- Restriction for Specified Entities: Companies, LLPs, and foreign entities are not eligible for this scheme.
Restrictions for Opting Presumptive Scheme Under Section 44AD(4)
Section 44AD(4) introduces a critical restriction for taxpayers who opt for the presumptive taxation scheme. If a taxpayer chooses the scheme in one financial year but decides to opt out in any of the subsequent years, they will be barred from re-entering the scheme for the next five consecutive assessment years. This restriction is designed to prevent taxpayers from arbitrarily switching between the presumptive and regular taxation schemes based on convenience. Once a taxpayer opts out, they will also be required to maintain detailed books of accounts and may be subject to a tax audit (if applicable) in subsequent years. This clause ensures consistency in compliance and prevents misuse of the scheme while allowing only genuine small businesses to benefit from it.
Maintenance of Books of Accounts and Tax Audit
One of the key advantages of the presumptive taxation scheme under Section 44AD is the exemption from maintaining detailed books of accounts. Taxpayers are not required to record every financial transaction or prepare comprehensive financial statements, as their income is presumed to be a fixed percentage (6% for digital transactions and 8% for cash transactions) of gross turnover or receipts.
Additionally, businesses under this scheme are exempt from undergoing a tax audit under Section 44AB, which is otherwise mandatory for businesses with a turnover exceeding Rs. 1 crore. However, if the taxpayer opts out of the presumptive taxation scheme or declares income lower than the prescribed percentage (6% or 8%) and their total income exceeds the basic exemption limit, they will need to maintain books of accounts and may also require a tax audit.
Payment of Advance Tax Under Section 44AD
Taxpayers opting for Section 44AD enjoy a simplified advance tax compliance process. Unlike regular taxpayers who need to pay advance tax in four installments (15%, 45%, 75%, and 100%), businesses under the presumptive taxation scheme are required to pay their entire advance tax liability by March 15 of the financial year.
This single-installment payment reduces the administrative burden and simplifies the process for small businesses. However, failure to pay advance tax by the due date may attract interest under Sections 234B and 234C of the Income Tax Act.
Difference between Section 44AD and Section 44ADA
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