Tax Filing: Choosing Between Section 44AD and 44ADA 

Presumptive taxation is a way to simplify tax filing for small taxpayers. It allows individuals to declare a fixed portion of their income as taxable without maintaining detailed books of accounts. This can benefit small business owners, shopkeepers, and freelancers who do not want the burden of regular accounting or audits.

There are two main sections under this system—Section 44AD and Section 44ADA—each catering to different types of work.

Knowing Section 44AD

Section 44AD is for small business operators like traders, local contractors, and even general store owners. This is for individuals, Hindu Undivided Families (HUFs), and partnership firms but is not applicable for Limited Liability Partnerships. If your total annual turnover is up to Rs 3 crore and at least 95 per cent of your payments are received digitally, you can declare 8 per cent of your turnover as income, or 6 per cent if payments are fully digital, and pay tax on that amount.

What Section 44ADA Offers Professionals

Section 44ADA has been specially prepared for professionals, including doctors, lawyers, engineers, architects, designers, consultants, and writers. So, if you have total receipts of up to Rs 75 lakh in a financial year and 95 per cent of your income is received digitally, you may opt for Section 44ADA. Here, 50 per cent of your receipts are treated as your taxable income, and you don't require showing individual expenses or maintaining detailed records.

This makes 44ADA specifically beneficial to freelancers and self-employed persons, who typically lack accounting systems. 

Common Errors While Selecting The Correct Section For Tax Filing

Despite the simplicity of these schemes, many small taxpayers make errors. Freelancers might wrongly opt for 44AD when they actually fall under professional income. Others may not meet the digital receipt condition but still try to claim benefits. Not all income types are treated equally, and misunderstanding this can lead to notices from the tax department or disqualification from the scheme in future years.

Things To Consider Before Opting In

Declaring under 44AD or 44ADA saves paperwork but with some compromises. You can't claim actual business expenses even though the actual expenses you incur are more than the presumed ones. Banks and financial institutions also might raise an eyebrow over the income you report if it seems too low, which can hamper your loan or credit eligibility.

Another point to remember is consistency. If you opt in for presumptive taxation, it is expected that you continue using it for a few years. If you exit before the minimum period, you might have to maintain full books of accounts and even get them audited going forward.

But, looking at a bigger picture, this facilitates better comfort and reduced stress on payment of taxes for professionals and freelancers. Similar is the case for small business owners with lesser turnovers through Section 44AD. But they need to determine which one applies to them. More often, people pick the wrong option, which turns into more trouble than ease.