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Section 44AD is a simplified taxation scheme for small businesses. Instead of maintaining detailed books of account and calculating actual profit, eligible taxpayers can declare income at a prescribed percentage of turnover and pay tax on that deemed income. Under Section 44AD, taxpayers with business turnover below Rs. 2 Cr can report their taxable business income as 8% of their turnover. But if the gross receipts received in cash are less than 5% of the total receipts, then taxpayers with business turnover up to Rs. 3 Cr can disclose taxable income at 6% of their turnover.
Under Section 44ADA, taxpayers with professional income can report their taxable income at 50% of their gross receipts, if their gross receipts is within Rs. 75 lakh limit.
The government has added a new column to the ITR form for presumptive taxpayers to report their year-end investments alongside their income.
To give relief to small or medium-sized taxpayers, the Income Tax Act allows eligible small taxpayers to declare income on a presumptive basis, thus avoiding the burden of maintaining books of accounts and audits. Instead of calculating actual profit, a fixed percentage of turnover is assumed as income, and taxes are paid accordingly, or not paid at all if the income falls under the taxable threshold after rebates.
A similar scheme under Section 44ADA applies to professionals like doctors, lawyers, and architects, but with different conditions.
The limits under the presumptive taxation scheme for FY 2024-25 (AY 2025-26) are as follows -
| Category | Limits | |
|---|---|---|
| When the Cash Receipts does not Exceed 5% of the Total Turnover of the Financial Year | When the Cash Receipts does Exceeds 5% of the Total Turnover of the Financial Year | |
| Sec 44AD: For small businesses | Rs. 3 crore | Rs. 2 crore |
| Sec 44ADA: For professionals like doctors, lawyers, engineers, etc. | Rs. 75 lakh | Rs.50 lakh |
Note: This increase in the limits applies only when over 95% of transactions are made in digital form. This means the cash transactions of the business should not exceed 5% of the total transactions.
The individual taxpayers who can avail the benefits of the scheme of presumptive taxation under Section 44AD are:
The businesses who are eligible to gain the benefits of the scheme of presumptive taxation under Section 44AD are:
Example:
Mrs. X has a small departmental store. The annual turnover of her store for the financial year 2015-16 was Rs. 80 lakh. She is eligible to adopt the scheme of presumptive taxation under Section 44AD so that she can avoid tiring paperwork that is involved during the time of filing taxes at the end of the financial year.
Individuals who have claimed deductions under Section 10A, Section 10AA, Section 10BA, Section 10B, or other deductions in respect of individual incomes.
The scheme is not available to:
Note: The individual can declare an income higher than the presumptive income as per the scheme in his or her income tax return.
Example:
Mr. Y has a shop of grocery whose annual turnover for the previous financial year was Rs. 90 lakh with 10% transactions in cash. He is eligible to gain the benefits of presumptive taxation under section 44AD. He adopts the provisions of this scheme for taxation in his business. The income will be calculated with the estimation method as his turnover was less than the limit, that is mentioned as Rs 3 crores. The rate at which it will be computed is 8% of his total turnover.
In his case, the presumptive income will be 8% of 90,00,000 = Rs. 7,20,000
Note:
Section 44AD was introduced specifically for small businesses having a turnover within specified limits. This section simplifies the process of tax filing for small businesses and reduces the compliance requirements.
The major provision related to presumptive taxation is to give relief to small or medium-sized taxpayers from maintaining books of accounts. The individual or firm who adopts presumptive taxation under section 44AD is not liable to maintain books of accounts. They are also not required to get their accounts audited under this scheme.
For example:
Mr. Manik is running a stationery store. His annual turnover for the previous year is Rs. 50 lakh. He opted for presumptive taxation scheme under Section 44AD. In this case he is not liable to maintain the books of account related to his business nor to get his accounts audited as per the regulations mentioned in Section 44AD.
An assessee is liable to pay his or her advance tax in a single installment on or before the 15th of March of every financial year if they opt for presumptive taxation under Section 44AD. For any default in paying the advance tax, the assessee will be charged interest under Section 234C.
Yes, presumptive taxpayers can switch between the old and new tax regimes, but unlike salaried individuals, they do not have the flexibility to change their choice every year.
Taxpayers with business or professional income who file returns using ITR-3, ITR-4, or ITR-5 can opt out of the default new tax regime by filing Form 10-IEA and choosing the old tax regime. However, this option is subject to specific restrictions. Once a taxpayer opts out of the new tax regime and moves to the old regime, they can subsequently switch back to the new regime only once while continuing to have business or professional income.
As a result, the decision to opt out of the new tax regime is significant and should be made after carefully evaluating the long-term tax implications, as the flexibility to switch regimes is limited.
Any business whose annual turnover or gross receipts in the previous year is less than Rs. 3 crores. The business can be any business except playing, hiring, agency business, and more.
Any small or medium sized business can opt this scheme and get relief from maintaining and auditing their books of accounts. The presumptive income will be computed on the basis of the estimation of the previous years turnover or gross receipts.
The estimation of presumptive income is done at the rate of 8% of the total turnover or gross receipts of the last year.
If the transactions of the business is done digitally this rate changes to 6% of the total turnover or gross receipts.
If a taxpayer adopts a presumptive tax scheme, he or she is not required to maintain any books of accounts under section 44AD. They just have to declare his or her presumptive income on the basis of 6% or 8% (as applicable)of the total turnover or gross receipts of last year.
No, Sec 44AD is applicable only to individuals/HUFs/Partnership firms (Not limited liabilities firms).
Taxpayers paying tax under the presumptive scheme then only one installment is their to pay advance tax.
Commission income is not covered under 44AD.
Yes, both sections can be used together.
As per the provisions under Section 44AD, computed presumptive income takes 6% or 8% of gross receipts or turnover of the eligible business for the previous year.
Yes individual can declare his income u/s 44AD.
Persons eligible to get benefits are individuals/ HUF/ Partnership firms other than LLP.
An insurance agent is allowed to adopt the presumptive scheme.
computed presumptive income taking 6% or 8% of gross receipts or turnover of the eligible business for the previous year.
Under the Presumptive income scheme taking 8% of gross receipts or turnover.
