Section 44AD: Income of Business 8% – Latest Updates

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Section 44AD: Income of Business 8% as per The Income Tax Act, 1961. Find Complete for Section 44AD. In this article you can find complete details for Section 44AD like – Introduction for Section 44AD, What is Section 44AD, What are the criteria for Section 44AD, How to Apply for Section 44AD, What if he declares income lower than 8%? and Examples for Section 44AD, Now you can scroll down below and Check complete details regarding “Section 44AD: Income of Business 8%”

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Section 44AD: Income of Business 8%

In order to prove the above quote correct, The Income Tax Act, 1961 has laid down the rules & provisions of collecting taxes in such a way that there would be no loss for the tax collectors & no extra burden on the tax payers. One such section in this regard is Section 44 AD describing computation of income on estimated basis in the case of taxpayers engaged in certain business.

So now, Let us have a brief look on the provisions of the aforesaid Section:

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What are the criteria?:

  • The assessee should be an eligible assessee. ( An eligible person is a resident individual or a resident HUF or a resident partnership firm.)
  • He should not claim any deductions under section 10A, 10AA, 10B, 10BA, 80HH, 80RRB.
  • His turnover/ gross receipts should not exceed Rs. 2 crore in the relevant financial year. (limit of Rs. 1 Crore has been increased to Rs. 2 Crore in Budget 2016. This revised limit would be applicable from Financial Year 2016-17 onwards.)
  • He can be engaged in any business except for the following:
    • Profession as refereed in section 44AA(1),
    • Income in the nature of Commission or Brokerage,
    • Agency business,
    • Plying, hiring or leasing goods carriages.

Applicability of Section 44AD

A person can opt for presumptive scheme under section 44AD

  • Only applies in case of Individual, Partnership & HUF provided they are Resident in India.
  • who is carrying his business and his total sales/turnover does not exceeds Rs. 2 crores and
  • who is not claiming deductions under section 10A/10AA/10B/10BA or under sections 80HH to 80RRB in the relevant year and
  • who is not carrying business of
    • plying, hiring or leasing goods carriages referred to in sections 44AE.
    • any agency business. and
  • who is not earning income in the nature of commission or brokerage

In case of a person adopting the provisions of section 44AD, income will be computed on presumptive basis, i.e., at least @ 8% of the turnover or gross receipts (6% in respect of total turnover or gross receipts which is received by an account payee cheque or draft or use of electronic clearing system or through such other electronic mode) of the eligible business for the year and the provisions of allowance/disallowances as provided under the Income-tax Law will not apply. However, the assessee can claim deduction under chapter VI-A.

Amendments in Budget 2020-2021

Turnover not more than Rs. 5 crores, but Cash receipts not exceeding 5% of total turnover and cash payments not exceeding 5% of total expenditure

⇓

Not liable for Tax Audit from F.Y 2020-2021 onwards

Example – A company having turnover Rs. 4.5 crores in F.Y 2020-21, then that company is not liable for tax audit.

Turnover less than Rs. 2 crores(but more than Rs.1 crore), but Cash receipts exceeding 5% of total turnover and cash payments exceeding 5% of total expenditure

⇓

Liable for Tax Audit under section 44AB from F.Y 2020-2021 onwards if the assessee does not declare profits at least 6% or 8% as per section 44AD

Example – A company having turnover Rs. 1.5 crores in F.Y 2020-21 and more than 5% of business transaction is in cash will be liable to Tax Audit if the assessee does not show Profits at least 6% or 8% as per section 44AD.

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How to apply the above section?:

  • His taxable income would be considered to be at least 8% of his total turnover/ gross receipts.
  • He can voluntarily declare more income.
  • He is not required to maintain books of accounts.
  • The individual/HUF can submit ITR 4S which is quite easy as compared to ITR 4.
  • He will not get any deductions under section 30 to 38. (Example: he cannot claim deduction in respect of depreciation as it is already deemed to be allowed.)

EXCEPTION: In the case of a partnership firm, deduction under section 40(b) regarding remuneration & interest to partners will be allowed.

What if he declares income lower than 8%?:

If he declares income lesser than 8% of his turnover/ gross receipts, irrespective of his turnover or income, he would be required to:

  • Maintain books of accounts as per section 44A
  • Get accounts audited under section 44AB.

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Examples:

  • If Mr. Taxplanner has a total turnover/ Gross Receipts of Rs. 30 Lakhs & he is an eligible assessee, then he can consider at least 2.4 Lakhs (8% of Turnover/Gross Receipts) to be his Taxable income under section 44AD.
  • If Mr. Chintalal has a total turnover/ Gross Receipts of Rs. 250 Lakhs & he is an eligible assessee, still he cannot compute his income under section 44AD as his turnover/ Gross Receipts exceeds the specified limit of Rs. 2 crore.

Thus, we can see that how beneficial this section is for common businessmen whose turnover/ gross receipts is not very high. A large number of Taxpayers in India are availing the benefit of this section & awareness about this section is a must for every eligible tax payer

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