Section 44AD and 44ADA were primarily introduced to provide relief to small taxpayers from the tiring and complicated process of maintenance of accounts and getting them audited.
As per section 44AD, any individual, HUF, or Partnership firm (other than LLP), having annual turnover of up to ₹2 crores, can declare 6% or 8% of its turnover or actual profits whichever is higher as taxable income.
Similarly, as per section 44ADA, a professional with gross receipts up to ₹50 lakhs, can declare 50% of their gross receipts or actual profits whichever is higher as taxable income.
In Budget 2023, FM Nirmala Sitharaman has proposed enhanced limits under both these sections to ease compliance for MSMEs and professionals, as under:
The turnover limit under section 44AD has been increased to ₹3 crores from the earlier ₹2 crores, and for professionals, the gross receipts have been increased to ₹75 lakhs from the earlier ₹50 lakhs under section 44ADA. This is applicable from FY 2023-24/AY 2024-25 onwards.
Note: These enhanced limits come with a condition that the amounts received in cash should not exceed 5% of the total turnover or gross receipts in that financial year.
Let’s understand the above-proposed amendment with the help of certain examples.
Example 1: Dr. Mehta is a practicing MBBS, having annual gross receipts of ₹73,00,000. Out of the total gross receipts Dr. Mehta received ₹5,00,000 Lakhs by way of cash.
Solution: In this case, though gross receipts are lower than the enhanced limit of ₹75 Lakhs, Dr. Mehta can not opt for Presumptive Taxation as the amount received in cash (i.e, ₹5,00,000) exceeds 5% (i.e, ₹3,65,000) of his total gross receipts.
Example 2: Mr. Shah who is involved in a trading business has an annual total turnover ₹2.8 Crore, out of which the amount received in cash is ₹10 Lakhs.
Solution: In this case, the turnover is less than the enhanced limit of ₹3 crore, so Mr. Shah can opt for presumptive taxation scheme, since the amount received by him in cash (₹10 lakhs) is less than 5%(ie, ₹14 lakhs) of the annual total turnover .
Calculation of Mr. Shah’s income:
Total turnover = ₹2.8 crore
- Non-cash turnover = ₹2.7 crore * 6%= ₹16.2 lakhs
- Cash turnover = ₹10 lakhs * 8% = ₹80K
Therefore, total Taxable Income= ₹16.2 lakhs + ₹80K = ₹17 Lakhs
Calculation of tax liability as per both the regimes as per budget 2023:
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