Understanding Section 44AD of the Income Tax Act: Simplified Taxation for Small Businesses

March 23, 2023

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Section 44AD of the Income Tax Act is a special provision that provides for a simplified scheme of taxation for small businesses. This provision is especially beneficial for small traders, manufacturers, and professionals whose annual turnover does not exceed a specified limit. In this blog, we will discuss the various aspects of Section 44AD, including its applicability, eligibility, and benefits.

Table of Contents

Applicability of Section 44AD

Section 44AD is applicable to small businesses whose gross turnover does not exceed Rs. 2 crore. It is applicable to both resident and non-resident taxpayers. However, it is not applicable to the following:

A person carrying on a profession as defined under Section 44AA(1)
A person earning income in the nature of commission or brokerage
A person carrying on a business of plying, hiring or leasing goods carriages
A person carrying on any agency business
A person engaged in the business of providing services

Eligibility for Section 44AD

In order to be eligible for the benefits of Section 44AD, the following conditions must be fulfilled:

The taxpayer must be a resident individual, Hindu Undivided Family (HUF) or partnership firm.
The taxpayer must be engaged in a business, other than the business of plying, hiring or leasing goods carriages or providing services.
The gross turnover of the business should not exceed Rs. 2 crore in a financial year.

Benefits of Section 44AD

Section 44AD provides the following benefits to small businesses:

The taxpayer is not required to maintain regular books of accounts.
The taxpayer is deemed to have earned a profit of 8% of the gross turnover or higher, as declared by the taxpayer.
The taxpayer is not required to get the accounts audited, unless the profits declared are less than 8% of the gross turnover.
The taxpayer is not required to pay advance tax in respect of income earned from the business covered under Section 44AD.

Limitations of Section 44AD

There are certain limitations to the benefits of Section 44AD, which are as follows:

If the taxpayer declares profits at a rate lower than 8% of the gross turnover, the taxpayer is required to maintain regular books of accounts and get them audited.
If the taxpayer has claimed deductions under Sections 10A, 10AA, 10B, 10BA or Chapter VI-A under the Income Tax Act, the taxpayer is required to maintain regular books ofaccounts and get them audited.
The taxpayer cannot set off any loss against income from the business covered under Section 44AD.

Calculation of Income under Section 44AD

As per Section 44AD, the income of the taxpayer is deemed to be 8% of the gross turnover or higher, as declared by the taxpayer. For example, if the gross turnover of a small business is Rs. 50 lakh, the income of the taxpayer under Section 44AD will be deemed to be Rs. 4 lakh (8% of Rs. 50 lakh). However, if the taxpayer wishes to declare a higher income, the same can be done by declaring a higher percentage of profit, but not less than 8%.

Maintenance of Books of Accounts

One of the major benefits of Section 44AD is that the taxpayer is not required to maintain regular books of accounts. However, it is important to note that the taxpayer is still required to maintain some basic records, such as details of the income earned, expenses incurred, and sales and purchases made during the year. These records will be useful in case the taxpayer is required to prove the correctness of the income declared.

Audit Requirement under Section 44AD

The taxpayer is not required to get the accounts audited if the income declared is 8% or more of the gross turnover. However, if the income declared is less than 8% of the gross turnover, the taxpayer is required to get the accounts audited by a Chartered Accountant. The audit report should be submitted along with the Income Tax Return. The due date for filing the Income Tax Return in case of a taxpayer covered under Section 44AD is July 31 of the Assessment Year.

Advance Tax Liability under Section 44AD

The taxpayer is not required to pay advance tax in respect of income earned from the business covered under Section 44AD. The entire tax liability can be discharged by payment of self-assessment tax at the time of filing the Income Tax Return.

Conclusion

In conclusion, Section 44AD of the Income Tax Act provides a simplified scheme of taxation for small businesses with a turnover of less than Rs. 2 crore. It offers relief from the burden of maintaining regular books of accounts and getting them audited. However, it is important to comply with the conditions and requirements laid down under this section to avail the benefits. Taxpayers covered under this section should also be aware of the limitations and ensure that they declare the income correctly.

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Frequently Asked Questions (FAQs)

Who is eligible for the benefits of Section 44AD?
A: Resident individuals, Hindu Undivided Families (HUFs), and partnership firms engaged in a business with a turnover of less than Rs. 2 crore are eligible for the benefits of Section 44AD.

Is Section 44AD applicable to non-residents?
A: Yes, Section 44AD is applicable to both resident and non-resident taxpayers.

What is the turnover limit for businesses covered under Section 44AD?
A: The turnover limit for businesses covered under Section 44AD is Rs. 2 crore.

Is Section 44AD applicable to businesses providing services?
A: No, Section 44AD is not applicable to businesses providing services.

Is it mandatory to opt for Section 44AD?
A: No, it is not mandatory to opt for Section 44AD. Taxpayers can choose to be taxed under the regular provisions of the Income Tax Act if they wish to.

What is the rate of income deemed under Section 44AD?
A: The income deemed under Section 44AD is 8% of the gross turnover or higher, as declared by the taxpayer.

Can a taxpayer declare a higher income than the one deemed under Section 44AD?
A: Yes, a taxpayer can declare a higher income than the one deemed under Section 44AD by declaring a higher percentage of profit, but not less than 8%.

What records should be maintained by taxpayers covered under Section 44AD?
A: Taxpayers covered under Section 44AD are required to maintain basic records such as details of income earned, expenses incurred, and sales and purchases made during the year.

Is a taxpayer covered under Section 44AD required to get the accounts audited?
A: A taxpayer covered under Section 44AD is not required to get the accounts audited if the income declared is 8% or more of the gross turnover. However, if the income declared is less than 8% of the gross turnover, the taxpayer is required to get the accounts audited.

What is the due date for filing the Income Tax Return for taxpayers covered under Section 44AD?
A: The due date for filing the Income Tax Return for taxpayers covered under Section 44AD is July 31 of the Assessment Year.