Section 44AD of Income Tax Act
Section 44AD of the Income Tax Act provides tax relief to certain individuals and professionals, exempting them from the requirement of getting an audit performed or showing books. However, this provision does not apply to assessees engaged in professions listed under Section 44AA. The purpose of Section 44AD is to ease the tax burden on small taxpayers and assessees. Under this scheme, eligible individuals are not required to maintain or show books of account or undergo an audit. The scheme aims to provide relief to small business owners, except those engaged in businesses mentioned in Section 44AE. With the updates introduced in the Budget 2020, the benefits of Section 44AD have been extended to include professionals with a total income below Rs 50 lakhs during the financial year.
Here are the features of Section 44AD:
Tax calculation: Tax paid by the assessee under Section 44AD is calculated at 8% of the individual's gross turnover for the financial year, provided that the gross turnover is below Rs 1 crore. However, the Budget 2020 raised this limit to Rs 2 crore.
Applicability: This section applies to any business or profession, except those referred to in Section 44AE.
Taxation: Income calculated under this section is subject to taxation based on the slab rates prescribed by the Income Tax Act.
Restrictions on deductions: Assessees claiming deductions under this section cannot claim any further expenditure or depreciation, except for interest or payments made to partners.
Relaxations for maintaining books of accounts: Individuals who maintain books of accounts are offered relaxations under this section.
Individual income tax return: Individuals filing their income tax returns under presumptive income need to provide proof of the claimed profit earned.
Eligibility criteria to claim deductions under Section 44AD are as follows:
Professionals: Section 44ADA applies to professionals and came into effect in the financial year 2016-17.
India-based firms: Section 44AD is applicable to India-based firms, except for limited liability partnership (LLP) firms.
Business types: All types of businesses, except those involving hiring, plying carriages, or income received as brokerage or commission, are eligible under Section 44AD.
The application of Section 44AD includes the following:
Coverage: Section 44AD covers all types of businesses, excluding those falling under the provisions of Section 44AE, which involve the leasing, plying, or renting of goods.
Eligible entities: Individual assessees, Hindu Undivided Families (HUFs), and partnerships are eligible to claim deductions under Section 44AD if they are Indian residents. However, LLPs are not covered by this section.
Filing options: Assessees filing income tax returns under Section 44AD can choose to file returns at 8% or above. If they show earnings below 8% of the total turnover, they will be required to maintain books of accounts and undergo an audit by a certified Chartered Accountant.
Ineligibility: Section 44AD does not apply to assessees engaged in professions mentioned in Section 44AA. Assessees involved in agency work or earning income through commissions or brokerage are also ineligible for deductions under this section.
The application of Section 44AD with regards to allowances and disallowances is as follows:
Deductions: If an assessee files returns under Section 44AD, they cannot claim deductions under Section 30 to Section 38 of the Income Tax Act, including depreciation.
Partnership firms: If a partnership firm files returns under Section 44AD, additional deductions can be claimed under Section 40(b) for
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1.What is the purpose of Section 44AD of the Income Tax Act?
A. To provide tax relief to certain individuals and professionals
B. To exempt all individuals from paying taxes
C. To increase the tax burden on small taxpayers
D. To require audit and bookkeeping for all businesses
Ans :A. To provide tax relief to certain individuals and professionals
2.What is the tax calculation rate under Section 44AD for eligible individuals?
A. 8% of the individual's gross turnover
B. 20% of the individual's gross turnover
C. 15% of the individual's gross turnover
D. 10% of the individual's gross turnover
Ans :A. 8% of the individual's gross turnover
3.Which of the following businesses are eligible under Section 44AD?
A. Businesses involving hiring or plying carriages
B. Businesses receiving income as brokerage or commission
C. All types of businesses except those mentioned in options (a) and (b)
D. None of the above
Ans :C. All types of businesses except those mentioned in options (a) and (b
4.If an assessee files returns under Section 44AD and shows earnings below 8% of the total turnover, what is required?
A. They need to pay a higher tax rate.
B. They need to maintain books of accounts and undergo an audit.
C. They need to claim deductions under Section 30 to Section 38.
D. They need to file returns again under a different section.
Ans :B. They need to maintain books of accounts and undergo an audit.
5.Section 44AD does not apply to assessees engaged in professions mentioned in which section?
A. Section 44AA
B. Section 44AE
C. Section 44ADA
D. Section 44AF
Ans :A. Section 44AA
6.Assessees filing returns under Section 44AD can claim deductions under Section 40(b) if they are a:
A. Sole proprietor
B. Partnership firm
C. Hindu Undivided Family (HUF)
D. Limited Liability Partnership (LLP)
Ans : B. Partnership firm
7.If an assessee files returns under Section 44AD, can they claim deductions for depreciation?
A. Yes, they can claim deductions for depreciation.
B. No, they cannot claim deductions for depreciation.
C. It depends on the total income earned.
D. It depends on the type of business.
Ans :B. No, they cannot claim deductions for depreciation.