To ensure proper upkeep of accounting and hassle-free management of income tax, the Income Tax Act outlined different schemes and provisions. As per the Income Tax Act 1961, an individual who is conducting a business or involved in a profession needs to keep books of account. Managing books of account is not a simple task, and becomes a challenging task for small taxpayers. To ease them of this tedious task, the Government began a scheme of presumptive taxation. The scheme is included in Section 44AD and Section 44DAE of the Income Tax Act 1961.
This post examines the fine points connected with Section 44AD, its eligibility, features, and applications.
The government has launched the presumptive taxation scheme u/S 44AD to provide relief to small taxpayers with business income not exceeding Rs 2 Crores. Eligible taxpayers are permitted to calculate taxable income as a percentage of their turnover. Taxpayers involved in any business of hiring, plying, or leasing alluded to in section 44AE of the Act are not eligible. Taxpayers with professional income can choose the presumptive scheme as set out in Section 44ADA.
Overview of Section 44AD
Section 44AD makes it easy for small businesses to compute their taxable income. Rather than monitoring and deducting each expense from gross revenue, this scheme enables you to declare a specified percentage of your turnover as income—8% for cash transactions and 6% for digital payments.
For example, your business has a yearly income of Rs 100 lakhs, mainly through digital means. Instead of keeping detailed expenses and different financial records, you can state 6% of this amount (Rs 6 lakhs) as your taxable income. This presumption is then taxed as per standard income tax slabs.
The scheme eliminates the burden of exhaustive bookkeeping and helps small businesses concentrate on expanding their business rather than handling complex accounts.
Presumptive Taxation Limits
The presumptive taxation limits for FY 2024-25 (AY 2025-26) are as specified:
| Category | Limits |
| Section 44AD: For small businesses | Rs. 3 crore |
| Section 44ADA: For professionals like lawyers, doctors, engineers, etc. | Rs. 75 lakhs |
The rise in limits is contingent on a condition that 95% of the receipts must be via online modes.
Eligibility for Section 44AD
Section 44AD of the Income Tax Act in India offers a simplified presumptive taxation scheme for specific eligible businesses. To be qualified for Section 44AD, a taxpayer must fulfil the following criteria:
Turnover of Gross Receipts: The gross receipts or total turnover of the business should not surpass the defined limit. As of August 2023, the turnover limit for eligibility is INR 3 crores every financial year. Nonetheless, it is essential to consider the latest provisions and verify if any revisions have been made to this limit.
Nature of Business: Section 44AD applies to professionals and businesses. The scheme is mainly designed for small businesses, including partnerships, sole businesses, and limited liability partnerships (LLPs). It also applies if you operate your business as a Resident Hindu Undivided Family (HUF).
Digital Transactions (for lowered presumptive income rate): If gross receipts or turnover are obtained through digital methods, such as digital payment platforms or banking channels, the eligible taxpayer can receive a decreased presumptive income rate of 6% instead of 8%.
It is vital to note that certain professions, such as medical, accountancy, legal, technical consultancy, engineering, interior decoration, architectural, etc., are specifically exempted from the scope of Section 44AD. Professionals associated with these fields are not qualified for the presumptive taxation scheme under Section 44AD.
Conditions for Section 44AD
In a fascinating move, a new condition was imposed for taxpayers preferring presumptive income, i.e. –
If you do not continue presumptive tax advantages for a minimum of five years, you will lose them.
Particulars of the additional condition
This additional condition has been included by replacing sub-section (4) of 44AD, which is – if you are choosing the presumptive scheme, you must –
- State your profits according to the presumptive scheme for a minimum of 5 years in continuation.
Choose to display and file profits according to regular business (ITR-3) before the culmination of these 5 years. You will give up presumptive benefits and be disqualified from presumptive taxation for the ensuing 5 years.
For instance, Nitin has selected a scheme for AY 2024-25, so he is bound to continue that scheme for the following five AYs, i.e., from AY 2024-2025 to AY 2028-2029. If Mohan discontinues the scheme in AY 2025-2026, then he is not qualified to go for the scheme for the following five A, Y., i.e., AY 2025-2026 to AY 2029-2030.
Mark that 5 years shall be counted commencing the year in which you initially file the usual taxes (ITR-3) for such enterprise. The government is dissuading the taxpayers who misuse the scheme and repeatedly change their options.
Maintenance of Books of Account Under Section 44AD
The main provision linked to presumptive taxation is to offer relief to small or medium-category taxpayers from keeping books of accounts. The firm or individual who avails presumptive taxation under Section 44AD is not obligated to maintain books of accounts. They also do not need to get their accounts audited under this scheme.
Payment of Advance Tax under Section 44AD
An assessee is obligated to pay his or her advance tax in one installment on or before the 15th of March of each financial year if he or she chooses presumptive taxation under Section 44AD. For any default in paying the advance tax, the assessee will be levied interest under Section 234C.
ITR Form to Select for Section 44AD
If you’re filing taxes under Section 44AD, you must choose ITR-4 form for your income tax return.
Written Down Value and Depreciable Assets
The Written Down Value (WDV) concept is vital for businesses transacting in depreciable assets. Section 44AD eases the calculation of depreciation by removing the need for complex WDV computations. Taxpayers are entitled to claim depreciation on shares at the rate provided in the Income Tax Rules, so it is easier to account for this important element without the need for extensive book-keeping.
Professionals Under Section 44AD
Section 44AD benefits not only businesses but professionals too. Professionals like lawyers, doctors, and architects can choose the presumptive taxation scheme and report their income at a rate of 50% of gross receipts. This section greatly simplifies the process of tax compliance for professionals by allowing them to focus more on their professional practice and less on complicated accounting processes.
From the financial year 2016-17 and onwards, any professional assessee would be entitled to claim deductions and allowances under Section 44AD, subject to the condition that his or her total income received by him or her during the financial year does not exceed Rs 75 lakhs.
Bottom Line
Section 44AD of the Income Tax Act is a major provision for small firms, offering a simplified and hassle-free taxation scheme. By removing the obligation to maintain exhaustive books of accounts and tax audits, it significantly reduces compliance costs and burdens. The scheme facilitates ease of doing business, encourages digital payments, and ensures tax liability predictability. However, taxpayers need to adhere to the binding 5-year rule to avail themselves of these benefits.
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