Section 44AD of the Income Tax Act – Presumptive Scheme for Businesses

Section 44AD of the Income Tax Act – Presumptive Scheme for Businesses. Small businesses often struggle with the complexities of maintaining detailed books of accounts and going through audits. To provide relief and reduce the compliance burden, the Income Tax Department introduced a simplified taxation scheme under Section 44AD of the Income Tax Act. This section provides an easier way for small business owners to calculate their taxable income without the need for maintaining regular books of accounts or going through statutory audits. Let us understand in detail the eligibility, applicability, benefits, limitations, and conditions associated with Section 44AD of the Income Tax Act, particularly for the financial year 2024–25 (Assessment Year 2025–26).
What is Section 44AD of the Income Tax Act?
Section 44AD of the Income Tax Act is a presumptive taxation scheme applicable to small businesses in India. Under this scheme, eligible taxpayers are allowed to compute their income on a presumptive basis instead of calculating it based on actual profits and expenses. This scheme was introduced to make the income tax filing process easier for small businesses by removing the requirement of maintaining detailed books of accounts and getting them audited.
The income under this scheme is presumed to be a percentage of the gross receipts or turnover. The taxpayers are allowed to declare profits at 8% of their turnover. However, if the receipts are in digital mode or through banking channels, the presumptive rate reduces to 6%.
Who Can Opt for Presumptive Taxation Under Section 44AD of the Income Tax Act?
The following types of taxpayers are eligible to opt for the presumptive taxation scheme under Section 44AD of the Income Tax Act:

Only resident individuals, not non-residents, can avail of this scheme. It applies to small business owners operating as sole proprietors.

An HUF that is resident in India can also benefit from this scheme if it is engaged in eligible business activities.

Any resident partnership firm, other than a Limited Liability Partnership (LLP), can avail of this scheme. LLPs are specifically excluded from the benefits of Section 44AD.

Professionals such as doctors, lawyers, architects, and engineers cannot opt for Section 44AD of the Income Tax Act. However, they may choose a similar scheme available under Section 44ADA.
Presumptive Taxation Turnover Limits
As per the latest updates for Financial Year 2024–25 (AY 2025–26), a business can opt for Section 44AD of the Income Tax Act only if its total turnover or gross receipts during the previous year do not exceed:

Rs.3 crore – If cash receipts are limited to 5% or less of the total turnover. This condition promotes digital transactions and discourages cash dealings.

Rs.2 crore – If cash receipts exceed 5% of the total turnover during the financial year.

This revised limit was introduced to incentivize small businesses to adopt digital modes of payment and ensure better tax compliance.
Applicable Rates under Section 44AD of the Income Tax Act
Under the presumptive taxation scheme, the income is computed as a fixed percentage of the gross turnover:

If the business receives payments in cash, the income is presumed to be 8% of the total turnover.

If the business receives payments through account payee cheques, drafts, or digital modes, the income is presumed to be 6% of the turnover.

This means the actual profit or loss is not considered. The taxpayer must pay tax on this presumptive income, irrespective of the actual business earnings.
Benefits of Section 44AD of the Income Tax Act
The presumptive taxation scheme under Section 44AD of the Income Tax Act offers several advantages to small taxpayers:
No Need to Maintain Books of Accounts
One of the biggest reliefs provided under this scheme is that eligible taxpayers are not required to maintain regular books of accounts under Section 44AA. This reduces paperwork and administrative burden.
No Requirement of Audit
If a person opts for this scheme, he is not required to get his books of accounts audited under Section 44AB. This significantly reduces the cost and effort of statutory compliance for small business owners.
Simplified Tax Return Filing with ITR-4
Taxpayers who opt for the presumptive scheme can file their return using Form ITR-4, which is a much simpler return as compared to ITR-3. ITR-4 is specifically designed for taxpayers adopting presumptive taxation and includes basic details.
Advance Tax Payment Simplified
Taxpayers opting for Section 44AD of the Income Tax Act need to pay the entire advance tax in one installment by 15th March of the financial year. This is different from regular taxpayers who need to pay in quarterly installments.
Time and Cost Saving
Overall, the scheme saves time, money, and effort. It is especially beneficial for small shopkeepers, retailers, traders, and service providers engaged in eligible businesses.
Conditions for Availing Presumptive Taxation Under Section 44AD
To regulate the misuse of this scheme and encourage consistent compliance, the government has laid down additional conditions under Section 44AD of the Income Tax Act.
Mandatory Continuation for 5 Years
If a taxpayer opts for the presumptive taxation scheme, they must continue with this scheme for five consecutive assessment years. This condition discourages frequent switching between presumptive and regular taxation.
Consequences of Opting Out Early
If the taxpayer opts out of the scheme before completing five years and chooses to declare income as per the regular method (i.e., ITR-3), then he cannot opt for presumptive taxation for the next five assessment years. For example, if a person opts for the presumptive scheme in AY 2025-26 and switches to regular taxation in AY 2026-27, then he will not be allowed to opt for presumptive taxation from AY 2027-28 to AY 2031-32.
Applicability of Section 44AD(4)
This restriction under sub-section (4) of Section 44AD applies only when the taxpayer voluntarily declares income below the presumptive rate of 8% or 6%. If the reason for not opting the scheme is due to ineligibility (like exceeding turnover), then this restriction does not apply.
Illustration to Understand the Five-Year Condition
Let us understand this better with an example:

H opted for the presumptive scheme under Section 44AD of the Income Tax Act in FY 2024–25, where his turnover was Rs.1.5 crore. He declared profits of Rs.12 lakh.

In FY 2025–26, his turnover increased to Rs.3.1 crore, which exceeds the eligibility limit. He cannot opt for the scheme that year and must file returns under the regular method. In FY 2026–27, his turnover came down to Rs.1.9 crore, making him eligible again.

In such a case, he can again opt for the presumptive scheme in FY 2026–27, since he was ineligible in FY 2025–26 due to turnover, not because he voluntarily opted out. The 5-year restriction will not apply here.

Restrictions Under Section 44AD of the Income Tax Act
The scheme has certain restrictions to prevent misuse:

The scheme does not apply to persons carrying on profession as referred under Section 44AA(1). Professionals can opt for Section 44ADA.

It is not applicable to businesses of plying, hiring or leasing of goods carriages, which are covered under Section 44AE.

A taxpayer declaring profits below 6% or 8%, and not maintaining books of accounts, will have to get accounts audited under Section 44AB.

Once a taxpayer opts out voluntarily by showing lower profits, the restriction of not opting again for five years will apply.

Forms and Compliance Requirements
Taxpayers who opt for presumptive taxation under Section 44AD of the Income Tax Act are required to file Income Tax Return using Form ITR-4. This form is designed for small businesses under presumptive schemes and asks for minimal details like gross receipts, declared income, and mode of receipt (cash or digital). Advance tax must be paid by 15th March of the financial year. Delay in payment attracts interest under Sections 234B and 234C.
Difference Between Section 44AD and Section 44ADA
While both sections offer presumptive schemes, there are key differences:

Section 44AD applies to businesses, while Section 44ADA applies to professionals such as doctors, lawyers, architects, and engineers.

The turnover limit for Section 44AD is Rs.3 crore (if cash receipts are below 5%) and Rs.2 crore otherwise. For Section 44ADA, it is Rs.75 lakh (or Rs.50 lakh if cash receipts exceed 5%).

The presumptive income under Section 44ADA is considered at 50% of the gross receipts.

Latest Amendments and Digital Push
The government has revised the turnover limit under Section 44AD of the Income Tax Act to Rs.3 crore, provided the cash receipts do not exceed 5% of the total turnover. This amendment is aligned with the digital India initiative, encouraging small businesses to adopt cashless transactions. This digital push is significant because businesses accepting more than 95% of payments digitally are given higher turnover limits to avail of this scheme.
Conclusion
The presumptive taxation scheme under Section 44AD of the Income Tax Act is a valuable compliance relief tool for small businesses in India. It simplifies the tax computation process, eliminates the need for maintaining books of accounts, and reduces the burden of audits. With the enhanced turnover limit of Rs.3 crore for digitally compliant businesses, the scheme encourages more taxpayers to shift to cashless transactions. However, taxpayers must be cautious about the conditions attached, particularly the five-year continuity clause and restrictions on opting out. If you are a small trader or business owner with moderate turnover, Section 44AD of the Income Tax Act offers you a practical and hassle-free taxation option.
It is advisable to consult a qualified tax expert of Compliance Calendar LLP to know your eligibility and ensure compliance before opting for this scheme. Connect through mail at info@ccoffice.in or Call/Whatsapp at +91 9988424211.
FAQs
Q1. Who can opt for the presumptive taxation scheme under Section 44AD of the Income Tax Act?
Ans.  The presumptive taxation scheme under Section 44AD can be opted by resident individuals, resident Hindu Undivided Families (HUFs), and resident partnership firms (excluding LLPs) who are engaged in any eligible business. The gross turnover or receipts of the business should not exceed Rs.2 crore (or Rs.3 crore if cash receipts are less than 5%) during the financial year. Professionals or businesses engaged in plying, hiring, or leasing of goods carriages are not eligible under Section 44AD.
Q2. What is the turnover limit to avail of Section 44AD for FY 2024-25?
Ans. For Financial Year 2024-25 (Assessment Year 2025-26), a business can opt for the scheme if the turnover does not exceed Rs.2 crore. However, the limit is extended to Rs.3 crore if cash receipts do not exceed 5% of total turnover. This higher limit is meant to encourage digital payments and reduce cash transactions in businesses.
Q3. What percentage of profit needs to be declared under Section 44AD of the Income Tax Act?
Ans. Under Section 44AD, income is presumed to be:

8% of the turnover for cash receipts, and

6% of the turnover for digital or non-cash receipts (like bank transfers, UPI, debit cards, etc.).
 This declared income is considered final, and no further deductions for expenses are allowed.

Q4. Is it mandatory to maintain books of accounts under Section 44AD?
Ans. No, it is not mandatory to maintain books of accounts if you opt for the presumptive taxation scheme under Section 44AD. The scheme is specifically designed to provide relief from the maintenance of detailed accounting records and avoid tax audits under Section 44AB, making compliance easier for small taxpayers.
Q5. What happens if a taxpayer opts out of Section 44AD before 5 years?
Ans. If a taxpayer voluntarily opts out of the presumptive taxation scheme before completing five consecutive assessment years, they cannot opt back into the scheme for the next five years. This restriction is laid down in Section 44AD(4). However, if the taxpayer becomes ineligible due to exceeding the turnover limit, the five-year bar does not apply.
Q6. Can professionals such as doctors or lawyers avail benefits of Section 44AD?
Ans. No, professionals such as doctors, lawyers, chartered accountants, architects, etc., cannot opt for Section 44AD. Instead, they may choose the presumptive taxation scheme under Section 44ADA, which allows them to declare 50% of their gross receipts as income if their total receipts are within Rs.75 lakh (Rs.50 lakh if cash receipts exceed 5%).
Q7. What return form should be used under Section 44AD and what is the due date?
Ans. Taxpayers opting for Section 44AD of the Income Tax Act should file their income tax return using Form ITR-4 (Sugam). The due date for filing the return is 31st July of the assessment year unless extended by the Income Tax Department. The entire advance tax (if applicable) must be paid by 15th March of the financial year to avoid interest penalties.

Small businesses often struggle with the complexities of maintaining detailed books of accounts and going through audits. To provide relief and reduce the compliance burden, the Income Tax Department introduced a simplified taxation scheme under Section 44AD of the Income Tax Act. This section provides an easier way for small business owners to calculate their taxable income without the need for maintaining regular books of accounts or going through statutory audits. Let us understand in detail the eligibility, applicability, benefits, limitations, and conditions associated with Section 44AD of the Income Tax Act, particularly for the financial year 2024–25 (Assessment Year 2025–26).

What is Section 44AD of the Income Tax Act?

Section 44AD of the Income Tax Act is a presumptive taxation scheme applicable to small businesses in India. Under this scheme, eligible taxpayers are allowed to compute their income on a presumptive basis instead of calculating it based on actual profits and expenses. This scheme was introduced to make the income tax filing process easier for small businesses by removing the requirement of maintaining detailed books of accounts and getting them audited.

The income under this scheme is presumed to be a percentage of the gross receipts or turnover. The taxpayers are allowed to declare profits at 8% of their turnover. However, if the receipts are in digital mode or through banking channels, the presumptive rate reduces to 6%.

Who Can Opt for Presumptive Taxation Under Section 44AD of the Income Tax Act?

The following types of taxpayers are eligible to opt for the presumptive taxation scheme under Section 44AD of the Income Tax Act:

Only resident individuals, not non-residents, can avail of this scheme. It applies to small business owners operating as sole proprietors.
An HUF that is resident in India can also benefit from this scheme if it is engaged in eligible business activities.
Any resident partnership firm, other than a Limited Liability Partnership (LLP), can avail of this scheme. LLPs are specifically excluded from the benefits of Section 44AD.

Professionals such as doctors, lawyers, architects, and engineers cannot opt for Section 44AD of the Income Tax Act. However, they may choose a similar scheme available under Section 44ADA.

Presumptive Taxation Turnover Limits

As per the latest updates for Financial Year 2024–25 (AY 2025–26), a business can opt for Section 44AD of the Income Tax Act only if its total turnover or gross receipts during the previous year do not exceed:

Rs.3 crore – If cash receipts are limited to 5% or less of the total turnover. This condition promotes digital transactions and discourages cash dealings.
Rs.2 crore – If cash receipts exceed 5% of the total turnover during the financial year.

This revised limit was introduced to incentivize small businesses to adopt digital modes of payment and ensure better tax compliance.

Applicable Rates under Section 44AD of the Income Tax Act

Under the presumptive taxation scheme, the income is computed as a fixed percentage of the gross turnover:

If the business receives payments in cash, the income is presumed to be 8% of the total turnover.
If the business receives payments through account payee cheques, drafts, or digital modes, the income is presumed to be 6% of the turnover.

This means the actual profit or loss is not considered. The taxpayer must pay tax on this presumptive income, irrespective of the actual business earnings.

Benefits of Section 44AD of the Income Tax Act

The presumptive taxation scheme under Section 44AD of the Income Tax Act offers several advantages to small taxpayers:

No Need to Maintain Books of Accounts

One of the biggest reliefs provided under this scheme is that eligible taxpayers are not required to maintain regular books of accounts under Section 44AA. This reduces paperwork and administrative burden.

No Requirement of Audit

If a person opts for this scheme, he is not required to get his books of accounts audited under Section 44AB. This significantly reduces the cost and effort of statutory compliance for small business owners.

Simplified Tax Return Filing with ITR-4

Taxpayers who opt for the presumptive scheme can file their return using Form ITR-4, which is a much simpler return as compared to ITR-3. ITR-4 is specifically designed for taxpayers adopting presumptive taxation and includes basic details.

Advance Tax Payment Simplified

Taxpayers opting for Section 44AD of the Income Tax Act need to pay the entire advance tax in one installment by 15th March of the financial year. This is different from regular taxpayers who need to pay in quarterly installments.

Time and Cost Saving

Overall, the scheme saves time, money, and effort. It is especially beneficial for small shopkeepers, retailers, traders, and service providers engaged in eligible businesses.

Conditions for Availing Presumptive Taxation Under Section 44AD

To regulate the misuse of this scheme and encourage consistent compliance, the government has laid down additional conditions under Section 44AD of the Income Tax Act.

Mandatory Continuation for 5 Years

If a taxpayer opts for the presumptive taxation scheme, they must continue with this scheme for five consecutive assessment years. This condition discourages frequent switching between presumptive and regular taxation.

Consequences of Opting Out Early

If the taxpayer opts out of the scheme before completing five years and chooses to declare income as per the regular method (i.e., ITR-3), then he cannot opt for presumptive taxation for the next five assessment years. For example, if a person opts for the presumptive scheme in AY 2025-26 and switches to regular taxation in AY 2026-27, then he will not be allowed to opt for presumptive taxation from AY 2027-28 to AY 2031-32.

Applicability of Section 44AD(4)

This restriction under sub-section (4) of Section 44AD applies only when the taxpayer voluntarily declares income below the presumptive rate of 8% or 6%. If the reason for not opting the scheme is due to ineligibility (like exceeding turnover), then this restriction does not apply.

Illustration to Understand the Five-Year Condition

Let us understand this better with an example:

H opted for the presumptive scheme under Section 44AD of the Income Tax Act in FY 2024–25, where his turnover was Rs.1.5 crore. He declared profits of Rs.12 lakh.
In FY 2025–26, his turnover increased to Rs.3.1 crore, which exceeds the eligibility limit. He cannot opt for the scheme that year and must file returns under the regular method. In FY 2026–27, his turnover came down to Rs.1.9 crore, making him eligible again.
In such a case, he can again opt for the presumptive scheme in FY 2026–27, since he was ineligible in FY 2025–26 due to turnover, not because he voluntarily opted out. The 5-year restriction will not apply here.

Restrictions Under Section 44AD of the Income Tax Act

The scheme has certain restrictions to prevent misuse:

The scheme does not apply to persons carrying on profession as referred under Section 44AA(1). Professionals can opt for Section 44ADA.
It is not applicable to businesses of plying, hiring or leasing of goods carriages, which are covered under Section 44AE.
A taxpayer declaring profits below 6% or 8%, and not maintaining books of accounts, will have to get accounts audited under Section 44AB.
Once a taxpayer opts out voluntarily by showing lower profits, the restriction of not opting again for five years will apply.

Forms and Compliance Requirements

Taxpayers who opt for presumptive taxation under Section 44AD of the Income Tax Act are required to file Income Tax Return using Form ITR-4. This form is designed for small businesses under presumptive schemes and asks for minimal details like gross receipts, declared income, and mode of receipt (cash or digital). Advance tax must be paid by 15th March of the financial year. Delay in payment attracts interest under Sections 234B and 234C.

Difference Between Section 44AD and Section 44ADA

While both sections offer presumptive schemes, there are key differences:

Section 44AD applies to businesses, while Section 44ADA applies to professionals such as doctors, lawyers, architects, and engineers.
The turnover limit for Section 44AD is Rs.3 crore (if cash receipts are below 5%) and Rs.2 crore otherwise. For Section 44ADA, it is Rs.75 lakh (or Rs.50 lakh if cash receipts exceed 5%).
The presumptive income under Section 44ADA is considered at 50% of the gross receipts.

Latest Amendments and Digital Push

The government has revised the turnover limit under Section 44AD of the Income Tax Act to Rs.3 crore, provided the cash receipts do not exceed 5% of the total turnover. This amendment is aligned with the digital India initiative, encouraging small businesses to adopt cashless transactions. This digital push is significant because businesses accepting more than 95% of payments digitally are given higher turnover limits to avail of this scheme.

Conclusion

The presumptive taxation scheme under Section 44AD of the Income Tax Act is a valuable compliance relief tool for small businesses in India. It simplifies the tax computation process, eliminates the need for maintaining books of accounts, and reduces the burden of audits. With the enhanced turnover limit of Rs.3 crore for digitally compliant businesses, the scheme encourages more taxpayers to shift to cashless transactions. However, taxpayers must be cautious about the conditions attached, particularly the five-year continuity clause and restrictions on opting out. If you are a small trader or business owner with moderate turnover, Section 44AD of the Income Tax Act offers you a practical and hassle-free taxation option.

It is advisable to consult a qualified tax expert of Compliance Calendar LLP to know your eligibility and ensure compliance before opting for this scheme. Connect through mail at info@ccoffice.in or Call/Whatsapp at +91 9988424211.

FAQs

Q1. Who can opt for the presumptive taxation scheme under Section 44AD of the Income Tax Act?

Ans. The presumptive taxation scheme under Section 44AD can be opted by resident individuals, resident Hindu Undivided Families (HUFs), and resident partnership firms (excluding LLPs) who are engaged in any eligible business. The gross turnover or receipts of the business should not exceed Rs.2 crore (or Rs.3 crore if cash receipts are less than 5%) during the financial year. Professionals or businesses engaged in plying, hiring, or leasing of goods carriages are not eligible under Section 44AD.

Q2. What is the turnover limit to avail of Section 44AD for FY 2024-25?

Ans. For Financial Year 2024-25 (Assessment Year 2025-26), a business can opt for the scheme if the turnover does not exceed Rs.2 crore. However, the limit is extended to Rs.3 crore if cash receipts do not exceed 5% of total turnover. This higher limit is meant to encourage digital payments and reduce cash transactions in businesses.

Q3. What percentage of profit needs to be declared under Section 44AD of the Income Tax Act?

Ans. Under Section 44AD, income is presumed to be:

8% of the turnover for cash receipts, and
6% of the turnover for digital or non-cash receipts (like bank transfers, UPI, debit cards, etc.).

This declared income is considered final, and no further deductions for expenses are allowed.

Q4. Is it mandatory to maintain books of accounts under Section 44AD?

Ans. No, it is not mandatory to maintain books of accounts if you opt for the presumptive taxation scheme under Section 44AD. The scheme is specifically designed to provide relief from the maintenance of detailed accounting records and avoid tax audits under Section 44AB, making compliance easier for small taxpayers.

Q5. What happens if a taxpayer opts out of Section 44AD before 5 years?

Ans. If a taxpayer voluntarily opts out of the presumptive taxation scheme before completing five consecutive assessment years, they cannot opt back into the scheme for the next five years. This restriction is laid down in Section 44AD(4). However, if the taxpayer becomes ineligible due to exceeding the turnover limit, the five-year bar does not apply.

Q6. Can professionals such as doctors or lawyers avail benefits of Section 44AD?

Ans. No, professionals such as doctors, lawyers, chartered accountants, architects, etc., cannot opt for Section 44AD. Instead, they may choose the presumptive taxation scheme under Section 44ADA, which allows them to declare 50% of their gross receipts as income if their total receipts are within Rs.75 lakh (Rs.50 lakh if cash receipts exceed 5%).

Q7. What return form should be used under Section 44AD and what is the due date?

Ans. Taxpayers opting for Section 44AD of the Income Tax Act should file their income tax return using Form ITR-4 (Sugam). The due date for filing the return is 31st July of the assessment year unless extended by the Income Tax Department. The entire advance tax (if applicable) must be paid by 15th March of the financial year to avoid interest penalties.