Tax Planning with Section 44AD

November 20, 2022

Introduction

An average small business, whether established or a startup, does hundreds or even thousands of transactions annually. Unless there is a dedicated resource, recording every transaction can prove a difficult task to do on a day-to-day basis. To provide relief to such small businesses, the government has introduced Section 44AD, which allows for filing taxes on presumptive income.

Income Criteria

This section can only be used by businesses whose gross receipts from the business do not exceed ₹2 Crores. If this limit is exceeded then the business is ineligible to take advantage of this section.

What types of businesses can benefit?

  1. Resident Individual
  2. Resident HUF
  3. Partnership Firm

Despite meeting the above criteria, there are certain types of businesses that are not eligible for this section. Such businesses are

  1. Plying/leasing of carriage goods business
  2. Brokerage/Commission business
  3. Agency

Another advantage of section 44AD is that the tax rate is flat at 6%.

Example Tax Calculation

Mr.Ram has a total annual sales of ₹1.25 crores and tax for him will be ZERO. How???

We'll show you how. Follow to see how that works.

Total Income Chargeable based on daily receipts from bank ₹1.25 crores x 6% = ₹7,50,000

Statement of Income:

Income from Business            -            ₹7,50,000

Less: Deductions

    Under 80C                            -            (₹1,50,000)

    Under 80CCD-1B                -            (₹   50,000)

    Under 80D                            -            (₹   50,000)

    Total Deductions                 -            (₹2,50,000)

 

Total                                           -             ₹5,00,000

 

Calculating Tax Liability:

Income tax thereon @ 5%       -            ₹   12,500

Rebate U/S 87A                          -          (₹   12,500)    (Per Income Tax act, total income below ₹5,00,000 can get rebate U/S 87A)

 

Total Tax Payable                     -           ₹           0

 

Conclusion

As can be seen, section 44AD provides an easy way to save not just on your tax liability but on many resources that are needed to do more traditional taxation. A caveat with utilizing the section in your taxation is to stick to this section for at least a period of 5 consecutive years. If one chooses to opt-out of this scheme prior to that period then one will be restricted from using the scheme again for a period of 5 years.

 

With some diligence, it may be possible to have an even better plan that could either potentially reduce your tax liability further or set you up for potential advantages in the future. Talk to one of our tax professionals to discover such possibilities tailored to your situation and requirements.



Note: Above details are meant for generalized situations and shall not be used as a legal basis for any particular situation readers may have. We do provide tax consultations for specific scenarios and can be reached through our contact us form.



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