Taxation & Compliance
Posted on Jan 31, 2025
Tax compliance can be quite overwhelming for small entrepreneurs, especially in terms of complex paperwork and deadlines. What if it were easy? Section 44AD! A presumptive taxation scheme that presents easier income tax filing for small-scale businesses. It simply requires a fixed percentage of their turnover to report as incomes, dispensed with the need for detailed record-keeping or audits. Less paperwork, less stress!
Overview of Section 44AD
What is the Presumptive Taxation Scheme?
The presumptive taxation scheme provides the option of declaring income by a percentage of turnover rather than actual profits. Under Section 44AD, one can declare:
8% of total turnover for cash transactions
6% of total turnover for digital payments
This completely eliminates the cumbersome bookkeeping and tax audit that would otherwise form part of tax filing.
Section 44AD applicability
Section 44AD is available to:
Individuals, Hindu Undivided Families (HUFs), and Partnership Firms (excluding LLPs)
Businesses with a gross turnover of up to ₹2 crore in a financial year
Who is Not Eligible for Section 44AD?
This scheme does not apply to:
Section 44AD applies only to businesses engaged in trading, manufacturing, or other commercial activities. Professionals such as doctors, lawyers, consultants, and architects are not eligible for this scheme.
Non-resident taxpayers and LLPs
Businesses with turnover exceeding ₹2 crore
Key Features of Section 44AD
Simplified Income Declaration
Section 44AD simplified. Instead of maintaining complex financial statements, businesses can declare 8% (or 6% for digital transactions) of their turnover as income.
No Need for Detailed Books of Accounts
Businesses opting for Section 44AD are exempted from maintaining costly extensive books of accounts and other record-keeping.
Exemption from Advance Tax Instalments
Businesses under Section 44AD must pay advance tax, but in a simplified manner. Instead of quarterly payments, they are required to pay the entire tax liability in a single installment by March 15—provided their total tax liability exceeds ₹10,000.
Reduced Compliance Burden
Tax audit is completely exempted if small business owners avail presumptive taxation, thereby making tax filing easy and fast.
Conditions and Restrictions Under Section 44AD
Section 44AD conditions:
Declaring Lower Income
In case a taxpayer declares income less than 8% (or 6% for digital payments), he or she has to
Maintain books of accounts
Tax audit u/s 44AB
The 5-Year Lock-in Rule
If a taxpayer opts for Section 44AD but later declares income lower than 8% (or 6% for digital transactions), they must maintain books of accounts and undergo a tax audit under Section 44AB. Additionally, once they exit Section 44AD, they cannot opt for it again for five years.
Benefits of Section 44AD
Less Paper Work – No maintenance of detailed bookkeeping or extensive financial records are required.
Tax Burden Would be Lower- It encourages the small businesses for tax compliance due to reduced liability.
Promotes Digital Transactions – Businesses benefit from a lower tax rate (6%) on payments received digitally.
Section 44AD limitations
Turnover Limit of ₹2 Crore – Businesses with revenue beyond this threshold must follow regular taxation rules.
Not Applicable to LLPs and Professionals – LLPs and service-based professionals cannot use this scheme.
Lock-in Period Restriction – Once opted out, businesses cannot return to the scheme for five years, limiting flexibility.
Section 44AD vs. Regular Taxation
Section 44AD comparison with regular taxation:
Conclusion: Section 44AD summary
For small businesses, Section 44AD makes tax filing very simple and hassle-free. It helps businesspersons avoid all these problems like bookkeeping and tedious tax audits and do only business, not paperwork.
But before taking this option, the turnover limit and lock-in period would need to be taken into consideration. If your business qualifies, Section 44AD can reduce your compliance burden, lower tax payments, and encourage digital transactions.
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Frequently Asked Questions (FAQs)
What is Section 44AD of Income Tax Act?
Section 44AD is the presumptive taxation scheme that aids small businesses by simplifying their tax filing with the help of declaring a specific percentage of the turnover as income, rather than maintaining detailed books of accounts. Who is eligible for Section 44AD?
Who can opt for the presumptive taxation scheme?
If you’re an individual, HUF, or partnership firm (excluding LLPs) with annual turnover up to ₹2 crore, you can opt for Section 44AD. This scheme is specifically designed to ease tax compliance for small businesses.
What happens if I declare income below 8% under Section 44AD?
If you report less than 8% (or 6% for digital payments), be prepared for additional requirements. You’ll need to maintain proper books of accounts and undergo a tax audit, which can increase compliance costs.
Can Professionals Use Section 44AD?
No, they cannot. Section 44AD is for businesses. If you're a doctor, lawyer, consultant, or any other professional, you should take a look at Section 44ADA, which has a presumptive taxation scheme that is much the same as Section 44AD but only for professionals.
Is Advance Tax Applicable under Section 44AD?
Yes, but here's the good news—unlike regular taxpayers who must pay advance tax quarterly, those under Section 44AD only need to pay tax once by March 15. That's one less thing to worry about during the year.
