Presumptive taxation schemes like Section 44AD and Section 44ADA of the Income Tax Act, 1961 simplify tax compliance for small businesses and professionals by allowing them to pay taxes on a presumed income rather than actual income. This approach reduces the burden of detailed bookkeeping, audits, and other tax filing obligations.
What is Presumptive Taxation?
Presumptive taxation is designed to facilitate easier tax compliance through simplified calculations. Under these provisions, eligible taxpayers can declare their income at a standardized percentage of their turnover or receipts, bypassing the need for detailed expense tracking and extensive accounting.
Section 44AD - For Small Businesses:
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Applicability: This section applies to small businesses with a turnover of less than ?2 crores. It is particularly suited for traders, manufacturers, and certain service providers not covered under Section 44ADA.
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Tax Calculation: Businesses can declare 8% of their turnover as income if transactions are in cash or 6% if receipts are through digital means.
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Benefits: Simplified accounting, no need for detailed bookkeeping, and no audit requirement unless the declared income is lower than the presumptive rate and income exceeds the basic exemption limit.
Section 44ADA – For Professionals:
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Applicability: Targeted at specified professionals like doctors, lawyers, architects, and accountants, whose total gross receipts do not exceed ?50 lakhs per annum.
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Tax Calculation: Professionals can declare 50% of their total gross receipts as income.
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Benefits: Like Section 44AD, this section simplifies the compliance burden by eliminating detailed accounts and audits requirement unless the income declared is below 50% and exceeds the basic exemption threshold.
Key Differences Between Section 44AD and Section 44ADA:
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Nature of Applicability: Section 44AD applies to businesses, excluding those engaged in professional services, while Section 44ADA is exclusively for specified professionals.
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Presumptive Income Rate: Businesses under Section 44AD declare income at 6% or 8%, depending on the transaction mode. In contrast, professionals under Section 44ADA declare 50% of their receipts as income.
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Turnover Limit: The turnover limit for Section 44AD is ?2 crores, whereas the receipt limit for Section 44ADA is ?50 lakhs.
Amendments and Updates:
The thresholds and rates under these sections are periodically reviewed and updated to reflect economic trends and inflation. For instance, recent amendments have adjusted the turnover and receipt limits to accommodate more small businesses and professionals under these presumptive taxation schemes.
Conclusion:
Sections 44AD and 44ADA offer substantial relief from the rigorous demands of tax compliance, allowing small businesses and professionals to focus more on their core activities rather than on cumbersome accounting details. Taxpayers can significantly simplify their tax filing process by choosing the right section based on specific eligibility criteria. If you require further clarification or need help determining which section suits your business best, consider contacting ADCA's expert tax advisory services. We are here to help you navigate through your tax obligations effortlessly.
Read More about Section 44 AB of Income Tax Act.
FAQs
Who is eligible for 44ADA?
Eligibility for Section 44ADA extends to resident individuals, Hindu Undivided Families (HUFs), and partnerships (excluding LLPs) who are engaged in specified professions like legal, medical, engineering, architectural, accountancy, technical consultancy, interior decoration, or any other profession as notified by the CBDT. These taxpayers must have gross receipts not exceeding ?50 lakhs in the financial year.
Can I switch from 44AD to 44ADA?
Yes, taxpayers can switch from 44AD to 44ADA if they meet the eligibility criteria for the latter. The switch depends on the nature of the business or profession and whether the taxpayer falls within the specified turnover or receipt limits for each scheme
Is 44ADA compulsory for 5 years?
No, unlike Section 44AD, the five-year commitment does not apply to Section 44ADA. This means professionals opting for the presumptive scheme under 44ADA are not bound to continue it for five consecutive years. They can opt in or out of the scheme each year based on their eligibility and preference.
What is the turnover limit for 44ADA?
The turnover limit for professionals eligible under Section 44ADA is ?50 lakhs. This means that the gross receipts of the profession should not exceed this amount within the financial year to qualify for the presumptive taxation scheme under this section.
What is the new limit of 44AD?
The threshold for 44AD was increased to ?3 crores in cases where at least 95% of business transactions are done digitally. For other businesses, the turnover limit remains at ?2 crores for availing of the benefits under Section 44AD for presumptive taxation.
