Hey Insiders,

Are you a small business owner or a freelancer looking to simplify your tax process? Understanding Section 44AD of the Income Tax Act could be a game changer for you. This provision is designed to ease the burden of tax compliance, allowing eligible taxpayers to benefit from a more straightforward way to compute their business income.

What is Section 44AD?

Section 44AD, also known as the Presumptive Taxation Scheme, allows eligible taxpayers to declare a fixed percentage of their gross receipts or turnover as income and pay taxes on this amount, rather than maintaining detailed accounts of actual expenses.

Eligibility Criteria:

• Your business's gross receipts or turnover should not exceed ₹2 crores in the financial year. (Revised Limit in Budget 2023: ₹3 crores)

• This scheme is applicable to

  1. Resident individuals,

  2. Hindu Undivided Families (HUFs), and

  3. Partnership firms (excluding LLPs)

• The following businesses are specifically excluded from presumptive taxation:

  1. Life insurance agents,

  2. Commission of any kind, and

  3. Running the business of plying, hiring or leasing goods carriages.

Benefits of Opting for Section 44AD:

1. Simplified Record-Keeping: Reduces the burden of maintaining detailed books of accounts and undergoing audit processes.

2. Reduced Compliance: Makes the tax filing process simpler and less time-consuming.

3. Tax Planning Advantage: Helps in planning your taxes effectively as you can estimate your taxable income more predictably.

How It Works:

Under this scheme, you declare 8% of your gross receipts or turnover as your income if the earnings are in cash. If earnings are received via digital means, then only 6% of such turnover or gross receipts is counted as income. The amount declared as per these rates is considered the net income for the business and no further expenses will be allowed under this.

Example:

Mr. Sharma runs a small manufacturing business in India. For the financial year 2022-2023, his business has total gross receipts of ₹1.5 crores. Mr. Sharma has opted for the presumptive taxation scheme under Section 44AD. All his receipts are through banking channels.

Calculation under Section 44AD:

1. Total Gross Receipts: ₹1.5 crores

2. Presumptive Income Rate: 6% (since all receipts are through banking channels)

3. Presumptive Income Computed: 6% of ₹1.5 crores = ₹9 lakhs

So, Mr. Sharma will declare ₹9 lakhs as his income for the financial year 2022-2023 and pay tax on this amount according to the applicable income tax slab rates. This calculation simplifies his tax filing process as he does not need to maintain detailed accounts of expenses incurred in the business. Additionally, this presumptive income will be his net income, and he is not required to pay any advance tax for the business income under this scheme.

Important Considerations:

• Once you opt for Section 44AD, you are required to follow the scheme for the next 5 years. Failing to do so will disqualify you from reverting to the scheme for the next 5 years.

• Taxpayers who opt for this scheme are exempt from paying advance tax related to the business covered under Section 44AD.

How to Opt for Section 44AD?

To opt for the presumptive taxation scheme under Section 44AD, you need to file your returns using the ITR-4 form. It’s crucial to consider your business model and financial needs carefully before deciding to opt in or out.

I hope this overview helps you understand how Section 44AD can benefit your business.