Section 44AD Presumptive Taxation

Section 44AD provides relief to small business taxpayers while enjoying certain exceptions. These exceptions include businesses plying, hiring or leasing goods carriage as specified under Section 44AE and individuals owning agency businesses.

Presumptive taxation under Section 44AD allows taxpayers to pay tax on a percentage of their total revenue and pay tax on that. Instead of getting bogged down with maintaining detailed accounts, you can simply report your income based on a fixed percentage of your turnover.
Consider it a simplified tax return – just plug in your turnover; your income is presumed!

Also Read: Income Tax Deduction Under 80 C in India

The entities mentioned below Section 44 AD applicants, provided that their annual gross receipts do not exceed the prescribed limit from the previous financial year.

• Any tax paying resident of India.
• Resident Hindu Undivided Families (HUFs) conducting legitimate business activities.
• Partnership firms, barring Limited Liability Partnership (LLP) firms

Also Read: Who Should File Income Tax Return

The Budget 2025 saw amendments to Section 44AD and Section 44ADA, resulting in revised limits for presumptive income taxation.

Section 44AD was initially introduced to simplify the taxation process and provide relief to small taxpayers engaged in business activities. Under this scheme, eligible assessees could declare a prescribed percentage of their gross receipts or turnover as income, thereby reducing the burden of maintaining detailed books of accounts and undergoing audits.

Increased Turnover Threshold

The eligibility limit for small businesses to opt for presumptive taxation under Section 44AD has increased from ₹2 crore to ₹3 crore. Earlier, the limit was ₹1 crore, and now it has been revised to ₹3 crore, provided cash receipts are less than 5% of total turnover.

Presumptive Income Rates and Encouragement of Digital Transactions

Under Section 44AD, businesses can declare 8% of their total turnover as taxable income and produce their gross receipts as evidence of this income. Business owners also get a 2% discount rate, allowing them to declare only 6% of their total income as taxable if they are willing to process the whole transaction digitally. This has been done in an attempt to promote cashless business transactions for a more digitally evolved India.

Simplified Compliance

Taxpayers opting for this scheme are exempt from maintaining detailed books of accounts. This eliminates the need for audits, easing the compliance process.

Expansion to Emerging Sectors

The government has decided to expand its sectors into data centres, cloud computing, artificial intelligence (AI), semiconductors, biochemistry, and green technology. This inclusion aims to support innovation and entrepreneurship in India's frontier technologies by simplifying tax compliance for businesses operating in these sectors.

In the context of presumptive taxation, income is computed based on either 8% of turnover for cash receipts or 6% for digital payment receipts.

To understand this concept better, let's consider a practical example:

Suppose Mr Singh operates a cosmetic store with a turnover of ₹90 lakhs in the previous year. Opting for presumptive taxation under Section 44AD, his income will be calculated at 8% of his turnover, amounting to ₹7.2 lakhs. Here, Mr Singh's annual presumptive tax will be derived from the ₹7.2 lakhs income bracket.

Example Scenarios

1.Business Turnover ₹1.5 Crore (Digital receipts ₹1 crore, Cash receipts ₹50 lakh)

Presumptive Taxation: (6% of ₹1 crore) + (8% of ₹50 lakh) = ₹6 lakh + ₹4 lakh = ₹10 lakh

Actual Profit: ₹15 lakh

Taxable Income (New Rule): ₹15 lakh (since it is higher than ₹10 lakh)

2.Professional Income ₹60 Lakh (Section 44ADA)

Presumptive Profit (50%): ₹30 lakh

Actual Profit: ₹40 lakh

Taxable Income (New Rule): ₹40 lakh (since it is higher than ₹30 lakh)

• Prevention of Profit Suppression: This scheme was a boon to some businesses that are bringing in large profits. Under the presumptive taxation under section 44AD, small companies end up retaining a lot of their profit by declaring only the deemed percentage as declared by the government. Under the new regime, businesses are required to report their actual profit if they are exceeding the said threshold.

• Reduced Tax Disputes and Litigation: The last few years have witnessed much confusion regarding how much profit must be filed. With the revamp of the 44AD, this confusion has been solved, as the taxpayer and tax authorities have clear guidance, reducing any legal discrepancies.

• Encouragement for Honest Compliance: By doubling down on tax transparency and making it compulsory to declare actual profits, the government is fostering a healthy tax environment devoid of manipulative malpractices.

• Simplification While Maintaining Fairness: Section 44D provides easy measures for businesses to comply. The tax regime also eliminates the need for detailed bookkeeping for small taxpayers, ensuring that the actual profit is declared.

Also Read: All About TDS Tax Deducted at Source

The presumptive taxation scheme was introduced to simplify tax filing. It allows small businesses and professionals to declare a presumed percentage of their taxes based on their receipts and gross margin instead of maintaining detailed books of accounts.

• Section 44AD applies to small businesses with a turnover of up to ₹3 crore. The deemed profit rate is 8% for cash receipts and 6% for digital receipts.
• Section 44DA is also suitable for doctors, lawyers and architects, with gross receipts increased to ₹75 lakh under the new bill. They are required to declare 50% of their gross receipts as income.

Also Read: Benefits of Filing Income Tax Return

Remember, opting for Section 44AD means you trade the potential for claiming various deductions for the convenience of simpler compliance and potentially lower tax liability due to the presumed income calculation. Carefully evaluate your circumstances to decide if this is the right option for you.

It is important to consult with a tax advisor to understand which deductions you can still claim under Section 44AD. They can help you decide whether this scheme is suitable for your business based on your specific expenses and deductions.

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