Small business owners spend most of their time and energy in making their business big and successful. Regular tax assessment and maintaining account books are a costly and tedious affair for them. Section 44AD was introduced to reduce the compliance burden for small businesses and promote ease of doing business. This section makes tax filing simple and easy for small business owners. Section 44AD of the Income Tax Act allows you to pay tax at a fixed rate of your total turnover so you don’t have to maintain an account book with details of your income and expenditure.
To avail of the benefits of Section 44AD, you have to compute tax at the rate of 8% of the total annual business turnover for the previous financial year. Taxes will be calculated at 6% instead of 8% if the payments are received through cheque, bank draft or electronic account clearing system.
· You have to be a resident individual or a resident Hindu undivided family (HUF) or a resident partnership firm
· Your annual turnover must be less than Rs 2 crore. Businesses need to audit their accounts under section 44AB if their turnover is higher than Rs 2 crore.
If you are running multiple businesses, then the total turnover of all the businesses will be taken into account to determine your eligibility under Section 44AD. If you are involved in both business and professional practices, then only the income from your business will be considered.
· You should not have availed tax deduction under Section 10A, 10AA, 10B or 10BA
· You should not be in the business of hiring and plying goods vehicles
· The source of your earnings should not be brokerage or commission
Section 44AD does not cover the following –
· If you run an agency business, example – life insurance agents.
If you avail Section 44AD, then you can’t claim any deduction on the basis of depreciation.
To extend the provisions of Section 44AD, which is available to small businesses, to professionals, Section 44ADA was created.
Professionals with an annual income of less than Rs 50 lacs can use this if they work as:
· Legal advisors
· Medical practitioners
· Technical consultants
· Interior designers