Applicability of Sections 44AA, 44AB, 44AD, 44ADA for Income Tax AY 2025-26 (FY 2024-25)

The Indian Income Tax Act has several provisions to make compliance easier, especially for small taxpayers. Key sections include 44AA, 44AB, 44AD, and 44ADA. It's important to understand these sections as we prepare to file returns for Assessment Year 2025-26, related to Financial Year 2024-25.

Understanding the Key Sections

1. Section 44AA: Maintenance of Books of Account

This section outlines when a taxpayer must keep proper books of account and other documents. It's the first step in tax compliance.

Who needs to maintain books?

• Specified Professions: Individuals in specified professions (such as legal, medical, engineering, architectural, accountancy, technical consultancy, interior decoration, and film artists) must maintain books if their gross receipts exceed ₹1,50,000 in any of the last three previous years. For new professions, if estimated gross receipts exceed ₹1,50,000 in the first year.
• Businesses: If total sales, turnover, or gross receipts exceed ₹2.5 crore in any of the last three previous years. New businesses must maintain books if they expect income, sales, or gross receipts to exceed ₹2.5 crore or ₹25 lakh in the first year.
• Opting for Presumptive Taxation (44AD/44ADA) but reporting lower profit: If a taxpayer chooses presumptive taxation but reports profits lower than the prescribed rate, and their total income exceeds the basic exemption limit, they must maintain books of account.

Consequence of Non-Compliance: A penalty under Section 271A may be imposed, amounting to ₹25,000.

2. Section 44AB: Compulsory Tax Audit

This section requires certain businesses and professionals to have their accounts audited by a Chartered Accountant. The audit ensures proper compliance with the Income Tax Act.

Who needs a Tax Audit?

• Businesses: If total sales, turnover, or gross receipts exceed ₹1 crore in the previous year.

  Important Exception: The audit threshold increases to ₹10 crore if the total of cash receipts and cash payments does not exceed 5% of the total receipts and payments. This encourages digital transactions.

• Professions: If gross receipts exceed ₹50 lakh in the previous year.
• Opting out of Presumptive Taxation: If a taxpayer was under Section 44AD or 44ADA in any of the last five years and now reports profits lower than the prescribed presumptive rate, a tax audit is mandatory if their total income exceeds the basic exemption limit.

Due Date for Audit Report: The tax audit report must be submitted by September 30th of the assessment year (for example, September 30, 2025, for AY 2025-26).

Consequence of Non-Compliance: A penalty under Section 271B may be imposed, which is 0.5% of total sales, turnover, or gross receipts, up to a max of ₹1,50,000.

3. Section 44AD: Presumptive Taxation for Businesses

This simplified scheme helps small businesses by allowing them to declare income at a presumptive rate instead of keeping detailed books and undergoing an audit.

Who is Eligible?

• Resident Individual
• Resident Hindu Undivided Family (HUF)
• Resident Partnership Firm (excluding Limited Liability Partnership - LLP)

Not Eligible: Companies, LLPs, Non-residents.

Eligible Businesses: Any business (excluding plying, hiring, or leasing goods carriages covered under Section 44AE, or agency businesses, or businesses earning commission or brokerage income).

Turnover Limit: Total turnover or gross receipts must not exceed ₹2 crore in the previous year.

Presumptive Profit Rate:

• 8% of total turnover or gross receipts.
• 6% of total turnover or gross receipts if payments are received by account payee cheque, draft, electronic clearing system, or another specified electronic method during the previous year or before the return filing deadline. This promotes digital transactions.

Benefits: No need to maintain detailed books under Section 44AA. No tax audit required under Section 44AB unless certain conditions are met.

Important Conditions & The 5-Year Rule:

• All deductions (like depreciation, expenses) are considered allowed, and no further deductions are permitted.
• A taxpayer who opts for 44AD in a specific year and then opts out in any of the next five years cannot rejoin 44AD for the following five consecutive assessment years. This is known as the "5-year lock-in" period.
• If a taxpayer opts out of 44AD and reports profits lower than the presumptive rate, and their total income exceeds the basic exemption limit, they will need to get their accounts audited under Section 44AB.

4. Section 44ADA: Presumptive Taxation for Professionals

Like 44AD, this scheme simplifies tax compliance for small professionals.

Who is Eligible?

• Resident Individual
• Resident Hindu Undivided Family (HUF)
• Resident Partnership Firm (excluding Limited Liability Partnership - LLP)

Not Eligible: Companies, LLPs, Non-residents.

Eligible Professions:

• Legal, Medical, Engineering, Architectural professions
• Accountancy, Technical Consultancy, Interior Decoration
• Any other profession specified by the Board (for example, film artists, authorized representatives)

Gross Receipts Limit: Total gross receipts must not exceed ₹50 lakh in the previous year.

Presumptive Profit Rate: 50% of total gross receipts.

Benefits: No need to maintain detailed books under Section 44AA. No tax audit required under Section 44AB unless certain conditions are met.

Important Conditions & The 5-Year Rule:

• All deductions (like depreciation, expenses) are considered allowed.
• Similar to 44AD, if a professional opts for 44ADA and then opts out in any of the next five years, they cannot rejoin 44ADA for the next five consecutive assessment years.
• If a professional opts out of 44ADA and reports profits lower than 50% of gross receipts, and their total income exceeds the basic exemption limit, they will need to get their accounts audited under Section 44AB.

Key Considerations for FY 2024-25 (AY 2025-26)

• Choose Wisely: Opting for presumptive taxation can greatly reduce your compliance burden. However, if your actual net profit is lower than the presumptive rate (for example, less than 6%/8% for business or 50% for profession) and your total income is above the basic exemption limit, you may need to keep books and undergo an audit to declare a lower income.
• Maintain Basic Records: Even under presumptive schemes, keeping basic records of your gross receipts or turnover is wise. This helps in proving your eligibility and calculating your presumptive income accurately. Bank statements, digital payment records, and summary invoices are essential.
• The 5-Year Lock-in: Be cautious of the 5-year lock-in rule for 44AD and 44ADA. Once you opt out, you cannot return for five years. Plan your tax strategy carefully.
• Digital Transactions Benefit: Keep in mind the 6% rate for digital receipts under 44AD. Utilize digital transactions to take advantage of this lower presumptive rate.

While these sections aim to simplify taxation, understanding their specifics is crucial to avoid penalties and ensure smooth compliance. The limits and conditions cited are for Financial Year 2024-25 (Assessment Year 2025-26).

Conclusion

The presumptive taxation schemes under Section 44AD and 44ADA benefit small businesses and professionals by allowing them to focus more on their core activities instead of complex tax compliance. However, understanding the conditions, turnover limits, and the effects of opting in or out is essential. At the same time, complying with the requirements of Sections 44AA (books of account) and 44AB (tax audit) for those not included or opting out of presumptive schemes is equally important.

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