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Understanding Sections 44AD and 44ADA: Simplified Tax Provisions for Businesses and Professionals

3 min Read Jan 23, 2025

Sections 44AD & 44ADA – Special provisions for computation of profits and gains of eligible assessees engaged in eligible business and profession referred to in section 44AA(1) – Provisions of section 44ADA to be aligned with the provisions of section 44AD 

Tax compliance can often feel overwhelming, especially for small businesses and professionals. To make tax filing simpler, the Income Tax Act includes provisions under sections 44AD and 44ADA. These sections offer presumptive taxation schemes for eligible taxpayers, minimizing the need for complex bookkeeping and audits. However, certain inconsistencies in these provisions have raised practical concerns, prompting suggestions for improvement.

We, at Mind Your Tax, help the people and business community overcome these problems with ease. This article discusses sections 44AD and 44ADA in great detail, highlighting the importance of aligning the provisions for equity and simplicity.

Section 44AD: Simple Taxation for Small Enterprises

Who benefits?

Section 44AD applies to individuals, Hindu Undivided Families (HUFs), and partnerships (excluding LLPs) engaged in eligible businesses. It simplifies tax compliance by assuming a fixed profit margin on turnover or gross receipts.

Key Features:

  • Eligibility: Assessee must not have a turnover exceeding ₹2 crore in a financial year.

  • Presumptive Income: 8% of turnover is deemed as taxable profit. For digital transactions, this is reduced to 6%.

  • No Detailed Books of Accounts: In this scheme, there is no need to maintain detailed books of accounts.

  • Restriction on Reversal: After opting out, it is not possible to revert back to the scheme for five years.

Section 44ADA: Simplified Taxation for Professionals

Who Can Avail?

Section 44ADA is specifically made for professionals such as doctors, lawyers, architects, and other professions covered under section 44AA(1).

Main Features:

  • Eligibility: The gross receipts up to ₹50 lakhs are allowed under this scheme.

  • Presumptive Income: 50% of gross receipts are treated as taxable profit

  • No Detailed Record Needed: In this scheme also, as it is like section 44AD, no extensive bookkeeping is needed

  • Audit Mandate: As if actual income is less than 50% but total income is more than basic exemption limit then books must be audited.

Section 44AD and Section 44ADA Inconsistencies

Although both sections are trying to make tax filing easy, there is a marked difference between the two. Professionals under section 44ADA are required to maintain books of account and get them audited if their income falls below the presumptive threshold and exceeds the basic exemption limit.

For businesses under section 44AD, it's different. Such businesses need an audit only when the turnover surpasses ₹1 crore or in cases where turnovers do not surpass ₹10 crores with lesser cash transactions. The difference only adds more compliances to the professional, as opposed to the underlying concept of presumptive taxation.

Proposed Change to Harmonise Section 44ADA with Section 44AD

To redress this disparity, the aligning of section 44ADA with section 44AD is proposed.

Some suggestions:

  • Uniform Audit Requirements: Audit should only be required for professionals with gross receipts exceeding ₹50 lakhs, thereby obviating the present disparity.

  • Allow Deduction for Partner Payments: Firms must be allowed to deduct partner remuneration and interest from presumptive income under sections 44AD and 44ADA. This was previously permitted but subsequently withdrawn in the year 2016.

Advantages of Present Provisions

Easier Compliance:

 The process of removing extraneous audit requirements for professionals promotes fairness.

  • Promotes Digital Payments: Streamlined provisions encourage professionals to declare their income genuinely.

  • Clear and Simple: These subsections are matched to avoid any confusion and maintain transparency.

Provision of the Act: Section 44AB

Both section 44AD and section 44ADA are associated with the auditing requirement of section 44AB. Here is when an audit is compulsorily required,

  • For Business persons: Turnover is more than ₹1crore (or ₹10 crore with less cash transactions).

  • For Professionals: Gross receipts are above ₹50 lakhs.

  • For Lower Income Declaration: Where income is declared below the presumptive threshold and exceeds the basic exemption limit.

Mind Your Tax: Simplifying Tax for You

Understanding these provisions is critical for taxpayers seeking to simplify compliance. At Mind Your Tax, we specialize in making taxation seamless for businesses and professionals. Our team of experts ensures you make the most of these schemes while staying compliant with tax laws.

Why consider us?

We offer tax planning tailored for a single person, on presumptive basis and for conducting audit-free and compliance.

Conclusion

Sections 44AD &44ADA attempt at making taxation to eligible persons on simpler arithmetic operations. Yet with a non-meaningful difference between these sections create obstacles among professionals. Section 44ADA in unison withSection 44ADIsm a Fair as well as Convenient and Non Arbitrary Tax Compliance.

For all your tax-related issues, Mind Your Tax is here for you. We make taxes easy, so you can focus on growing your business. Contact us today for tailored solutions!