Srinidhi S
Section 44AD of the Income Tax Act, 1961, provides a simplified method of taxation for eligible taxpayers who carry on small businesses. It allows them to declare a fixed percentage of their total turnover or gross receipts as income. This is called the presumptive way of taxation. The main objective of Section 44AD is to promote ease of doing business by reducing the compliance burden for small taxpayers.
Who are eligible for Section 44AD?
The following are eligible only if they carry on certain “eligible businesses”.
- Individual,
- HUF,
- Partnership firm (not LLP)
Further, the following are not eligible:
- Profession as referred Section 44AA(1)engaged in Legal, Medical, Engineering, Architectural, Technical consulting, interior designing, etc
- Person earning income as commission or brokerage
- Person who is an agent
What are the businesses eligible under Section 44AD?
For a taxpayer to avail of the benefits of presumptive taxation under Section 44AD, they must be carrying on an eligible business. The criteria for eligible businesses are as follows:
- Any business except the plying, hiring or leasing goods carriages; and
- Total turnover/ gross receipts in the FY is not greater than Rs 2 crore/ Rs 3 crore.
Main provision
Once a business qualifies under Section 44AD, the taxable income is determined using a presumptive taxation method. This means that a fixed percentage of the total turnover or gross receipts is considered as the income of the taxpayer
- 8% of total turnover/ gross receipts (for cash receipts) or
- 6% of total turnover/ gross receipts (for bank receipts)
Any deduction from Section 30 to Section 38 for the purpose of business, like rent, repairs, insurance, depreciation, etc will not be allowed.If the taxpayer’s income is lower than the presumptive taxation income, they are required to get their accounts audited under Section 44AB, regardless of other audit thresholds.
Income Tax Return
For taxpayers opting for the presumptive taxation scheme under Section 44AD, ITR 4 is the prescribed Income Tax Return (ITR) form. However, an important provision to note is that once the taxpayer opts for the presumptive scheme, they must continue to use it for the next five consecutive years.
If a taxpayer does not declare income under Section 44AD in any one of those five years, they will lose the benefit of presumptive taxation for the next five years.
For instance, if a taxpayer opts for Section 44AD in FY 2024-25, they must continue for the next five years (i.e., FY 2025-26 to FY 2029-30). If they skip any year, say FY 2027-28, they will be ineligible to use Section 44AD for the next five years (i.e., FY 2028-29 to FY 2034-35).
| Particulars | Limit for Turnover |
| Cash receipts < 5% of total turnover | Rs. 3 crore |
| Cash receipts > 5% of total turnover | Rs. 2 crore |
Monetary example
Total turnover of the business in FY 2024-25 is Rs. 2.5 crore of which bank receipts are Rs 2.4 crore and cash receipts are Rs 10 lakh (4%). In this case, the limit is considered to be Rs 3 crore. Considering this is within the limit for Section 44 AD, the business can pay on presumptive basis. Accordingly, cash receipts will be calculated at 8% and bank receipts will be computed at 6%. This is calculated as Rs 15.2 lakh as income. If the actual profits are less than Rs. 15.2 lakh, the taxpayer must get their accounts audited under Section 44AB.
Is it true that businesses with up to ₹2 crore turnover will pay zero tax?
Yes, businesses with turnover up to ₹2 crore will pay zero tax from 1st April 2025.
The benefit is only given u/s 44AD, which allows small businesses to pay tax on presumed profits without maintaining detailed accounts.
This exemption is only applicable for businesses. Professionals like CAs, doctors, IT professionals, and artists cannot claim it as they covered u/s 44ADA.
What to do if the income is lower then 6% or 8%?
When a declared income is below 6% or 8%, then a person must -
- Maintain the books of accounts u/s 44AA
- Get accounts audited u/s 44AB
Note : Once opt for Section 44AD of Income Tax Act, you must follow the same for next 5 years. If you fails to do so, then scheme will not be available for next 5 Years.
Conclusion
Section 44AD offers a simple and efficient tax regime for small businesses with a turnover of up to Rs. 2 crore/ Rs 3 crore. It allows businesses to declare a fixed percentage of turnover as income and reduces the complexity of maintaining detailed accounts and records.
Related Articles
Section 44AB of income tax act - Click Here
Tax Audit Report - Click Here
FAQs
Presumptive Taxation Scheme u/s 44AD/44ADA/44AE to provide relief to small and medium taxpayers from tedious task of maintaining books of accounts and having the accounts audited.
Partnership firms cannot claim deductions if they opt for presumptive taxation under Section 44AD or 44ADA.
Section 44AD only applies to resident Individuals, Partnerships, and HUFs. It does not apply to Limited Liability Partnerships (LLPs).
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