Explainer: Difference between Section 44AD and Section 44ADA of I-T Act

Many taxpayers get confused between Section 44AD and Section 44ADA of the Income Tax Act. The names look similar, both deal with presumptive taxation, and both are meant to reduce compliance. But the two are meant for very different groups of people.

 

Section 44AD is designed for small businesses such as shopkeepers, traders, small contractors, or other business owners. It can be used by individuals, Hindu Undivided Families (HUFs), and partnership firms, though not by limited liability partnerships (LLPs). To be eligible, the business turnover should not exceed ₹2 crore in a financial year. Under this scheme, the taxpayer can declare 8 per cent of the turnover as profit, or 6 per cent if sales are made through digital transactions. The big advantage is that those who opt for this scheme do not need to maintain detailed accounts or get their books audited.

 

Section 44ADA, on the other hand, is meant for specified professionals such as doctors, lawyers, architects, engineers, accountants, and other notified professionals. It applies if gross receipts from the profession do not exceed ₹75 lakh in a year. In this case, 50 per cent of the gross receipts are presumed as profit and the remaining 50 per cent is presumed as expenses. Professionals opting for this scheme cannot separately claim deductions for expenses, since they are already factored in.

 

The confusion usually arises because both sections are about presumptive taxation, but their applicability is different. Many professionals mistakenly file returns under Section 44AD, thinking it will allow them to show only 6–8 per cent profit instead of 50 per cent. However, this option is not available to professionals. Using the wrong section is not a small mistake. It can lead to tax notices, higher liability, or even requirements for audit.

 

Specific areas of confusion

 

One of the categories of specified professionals under Section 44ADA is “technical consultancy”. However, the term itself has not been defined under the Act, creating ambiguity over its scope. It may cover cases of software consultants and data scientists, but not every activity that merely requires technical expertise, such as an artist.

 

Secondly, if you are a professional but not a specified professional, you will not get the benefit of Section 44ADA. But then, you are also not running a business and are not eligible for Section 44AD either. “In such cases, the tax calculation will be done in the traditional way, as per which income minus expenses is your taxable income. The benefit of presumptive taxation under Section 44AD and Section 44ADA is not available,” said Chetan Daga, founder of AdvantEdge Consultancy.

 

“Under both the provisions, while you are not required to maintain books of account, you are still required to report year-end balances of debtors, creditors, inventory, and cash. Hence, at least a reasonable approximation of these balances is necessary,” he said.

 

Also important to note is that your bank statement is not a part of books of account. So while you do not need to maintain books under the presumptive tax schemes, your bank statement can still be reviewed by the tax authorities to verify whether the incomes are properly disclosed, according to Daga.