Presumptive Taxation Scheme under Section 44AD

Running a small business in India comes with several types of challenges, and complex income tax compliance is one of them. To ease this burden, the Income Tax Department has introduced a special scheme called Presumptive Taxation under Section 44AD. This scheme is designed to simplify income tax filing for small taxpayers by allowing them to declare income at a fixed rate, without maintaining detailed books of accounts.

In this blog, we will discuss and explore the meaning, eligibility, benefits, calculation, and important points of the Section 44AD Presumptive Taxation Scheme in simple terms.

What is Section 44AD of the Income Tax Act?

Section 44AD is a provision under the Income Tax Act, 1961 that offers a presumptive income scheme for the purpose of small businesses. Under this scheme, eligible taxpayers can declare their income at a prescribed percentage of their total turnover or gross receipts, instead of maintaining detailed books of accounts and going through audits.

Who Can Opt for Section 44AD?

Eligible taxpayers:

• Resident individuals, Hindu Undivided Families (HUFs), and partnership firms (excluding LLPs).
• The taxpayer should be engaged in any business, except those mentioned under the ineligible categories.
• The total turnover or gross receipts should not exceed ₹3 crore in a financial year (₹2 crore earlier, but increased due to amendments).

Not eligible:

• Non-residents.
• LLPs (Limited Liability Partnerships).
• Professionals like doctors, lawyers, architects, etc. (They fall under Section 44ADA).
• Commission or brokerage businesses.
• Agency businesses.

Presumptive Income Calculation under Section 44AD

Under Section 44AD:

• Income
• is presumed at 8% of total turnover or gross receipts.
• If receipts are through digital means or bank transactions, then income can be declared at 6%.

For example:

• If a business earns ₹60 lakhs in a year:

• • 8% of ₹60,00,000 = ₹4,80,000 (if received in cash).

• • 6% of ₹60,00,000 = ₹3,60,000 (if received digitally).

This presumed income is considered as final taxable income, and the taxpayer does not need to maintain books or get audited, provided they declare income as per the scheme.

Benefits of Presumptive Taxation under Section 44AD

1. No need to maintain books of accounts under Section 44AA.
2. No audit required under Section 44AB.
3. Simple tax calculation – fixed percentage of turnover.
4. Ease of compliance for small taxpayers.
5. Encourages digital payments through a lower rate (6%).

Key Conditions and Points to Remember

1. Return Filing: You must file an Income Tax Return (ITR-4) using the presumptive scheme.
2. Advance Tax: From AY 2017-18 onwards, those opting for Section 44AD must pay 100% advance tax by 15th March of the financial year.
3. Continuity Rule: Once you opt for the scheme, you must continue for 5 years. If you opt out before 5 years, then you cannot opt in again for the next 5 years.
4. Deductions Not Allowed: No separate deduction under Sections 30 to 38 (like depreciation, expenses) is allowed.
5. If Actual Profit is Lower: If you want to declare income less than 6% or 8%, you need to maintain books and get a tax audit done under Section 44AB.

Presumptive Taxation vs Regular Taxation

Feature	Section 44AD	Regular Scheme
Books of Accounts	Not required	Mandatory
Audit Requirement	Not required	Required if turnover > ₹1 Cr
Income Calculation	Fixed % of turnover	Net profit after expenses
Deductions (like rent, salary)	Not allowed separately	Allowed
Advance Tax	100% by 15th March	Quarterly payments

Conclusion

Section 44AD is a great relief for small business owners who want to reduce the burden of tax compliance. It simplifies tax filing, avoids audit hassles, and encourages digital transactions. However, it’s important to understand the rules carefully and consult a tax expert if your business scenario is complex or if your income is significantly lower than the presumptive rate.

If your business turnover is under ₹3 crore and you want to simplify your tax return process, then Section 44AD can be an efficient choice.

FAQs

1. Who can opt for the presumptive taxation scheme under Section 44AD?

Only the resident individuals, Hindu Undivided Families (HUFs) and partnership firms (excluding LLPs) engaged in eligible businesses with a turnover of up to ₹3 crore can opt for this scheme. It is not available for professionals, commission agents, or non-residents.

2. Do I need to maintain books of accounts if I opt for Section 44AD?

No, if you declare income as per Section 44AD, you do not need to maintain books of accounts or get your accounts audited under Section 44AA or 44AB.

3. Can I declare income less than 8% (or 6%) under Section 44AD?

Yes, but if you do so, you must maintain regular books of accounts and get your accounts audited under Section 44AB, unless your total income is below the basic exemption limit.