The Indian Government has incorporated simplified schemes to reduce the burden of small taxpayers. One such is presumptive taxation under Section 44AD of Income Tax Act.

The next segment will provide an overview of various provisions of presumptive taxation under Section 44AD, its eligibility, features and deductions.

Under Section 44AD, small taxpayers are free from maintaining account books only if their sales or gross receipt are less than ₹ 2 crores. Moreover, according to presumptive income under Section 44AD, assesses can declare their gains at a prescribed rate to save time and required compliance costs.

Furthermore, if the income is credited via bank or digitally, profits will be considered as 6% as against 8% for cash receipts. Nonetheless, on adopting presumptive taxation under Section 44AD of Income Tax, assesses are not allowed a deduction for expenses u/s 30 to 38.

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Section 44AD applies to business and partnership firms.

1. Applicability of Section 44AD for Professionals

For professionals, provisions of Section 44ADA are applicable. It is a simplified taxation process implemented in the 2016-2017 financial year.

It only applies if assessees are associated with professions mentioned in Section 44AA(1), including engineering, architect, medical, legal, accountants, technical consultant, interior decoration or any other vocation as per the Board in the Official Gazette. Besides, the total turnover of these professionals must not exceed ₹ 50 lakhs in the previous year. Therefore, 44AD does not apply to professionals.

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2. Applicability of Section 44AD for Partnership Firm

Section 44AD applies to all India-grown firms except for limited liability partnership firms.

3. Applicability of Section 44AD for Business

Other than plying, hiring, leasing goods, carriages, income as commission or brokerage, or any agency business, all other businesses are eligible under Section 44AD. Additionally, a firm's or an individual's gross receipts of the previous year should not exceed ₹ 2 crores.

A few individuals do not qualify for the scheme benefits under Section 44AD, including-

• Section 44AD benefits are not available for firms and individuals associated with professional services and earn income through brokerage or commission. For such people, the Indian Government offers Section 44ADA for a presumptive scheme.

• Individuals involved with an agency business

• People are eligible to claim deductions under 10AA or Chapter VIA under Part C deductions against specific income.

• Suppose individuals go for a presumptive scheme for one financial year and provide turnover details as per the scheme and fail to file the return for 5 consecutive years under the scheme of 44AD. In that case, they are not eligible to claim benefits of the provisions of 44Ad for the next 5 assessment years (starting from the year in which profits were not provided according to the scheme).

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For better understanding, let us cite an example.

According to the provisions of Section 44AD, let's consider the scenario of Mr. B. For the assessment year 2021-2022, Mr. B opted to be taxed under the presumptive scheme. He declared an income of ₹10 lakhs based on a total turnover of ₹1.2 crores.

In the subsequent two assessment years, 2022-2023 and 2023-2024, Mr. B continued to provide income proof as per the provisions of Section 44AD. However, for the assessment year 2024-2025, he decided to declare his income under a different scheme, not opting for the presumptive scheme. In this case, he declared an income of ₹5 lakhs against a total turnover of ₹1.6 crores.

Since Mr. B did not declare his income under the presumptive scheme (Section 44AD) for five consecutive years, he will not be eligible to file an income tax return under the presumptive scheme (44AD) for the assessment years from 2025-2026 to 2029-2030.

Note: The illustration is based on regulations dated 20/12/2022 and may change if made any modifications.

Once individuals are aware of the eligibility, they must gain clarity regarding different features of Section 44AD to steer clear of hassles.

A few crucial features of Section 44AD of Income Tax Act includes-

• A sum equal to or greater than 8% of an individual's total profit or gross receipt is considered as business profit.
• The 8% rate is reduced to 6% to boost digital transactions and uplift businesses to opt for digital payments, including-
  • Credit cards
  • Debit cards
  • Account payee cheque or bank draft
  • Net banking
  • UPI
  • RTGS
  • IMPS
  • NEFT 
• Individuals can produce a return of income more than the presumptive income as evidence claimed as the actual profit. 
• Individuals must pay advance tax as per the whole amount on or before 15th March.
• Section 44AD offers exemptions to individuals who maintain books of accounts.

Being presumptive taxation, the income calculation is done according to the 8% turnover in the case of cash receipts or 6% for digital payments receipts.

Let us illustrate an example for comprehensive understanding.

Suppose the worth of Mr. K's grocery store is ₹ 90 lakhs in the previous year. If he opts for presumptive taxation under Section 44AD, his income will be calculated at 8% of his turnover, that is, ₹ 7.2 lakhs. Therefore, the annual presumptive tax of Mr. K will be deduced according to the ₹ 7.2 lakhs income slab.

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Section 44AD comes with certain deductions and allowances. They are-

• Permissible deductions under Sections 30 to 38 provisions should be considered already provided. Thus, taxpayers cannot claim any deductions further under the same circumstances.
• Section 44AD provisions do not permit an individual or a firm to file a deduction on interest account and salary paid to the partners.
• There are no disallowances available according to Sections 40, 40A and 43B.

Apart from these, according to the new conditions, the limitation that taxpayers cannot opt for presumptive taxation under Section 44AD of Income Tax Act for 5 years only applies if they show evidence that the profits are below 6% or 8%. If taxpayers do not consider the presumptive income scheme, then the reductions of Section 44AD(4) of Income Tax Act do not apply.