Presumptive Taxation under Section 44AD, 44AE and 44ADA for Businesses and Professionals

Generally, a person carrying on business or profession maintains books of accounts and prepares a balance sheet and a profit or loss account to understand the financial position of his business or profession for a financial year.

Under the income tax laws, a person engaged in prescribed business or profession is required to mandatorily maintain books of account, prepare financial statements and get his accounts audited. Further, profit/loss as per such financial statements would be considered to arrive at taxable profits after making necessary adjustments. However, to provide relief to small taxpayers from the tedious job of maintaining books of account and getting them audited, income tax law has introduced the concept of presumptive taxation scheme.

Budget 2023 Update

Budget 2023 increased the threshold limit u/s 44AD from Rs. 2 crores to Rs. 3 crores and limit u/s 44ADA from Rs. 50 lakhs to Rs. 75 lakhs.

However, the increased limit will be available only if the cash receipt does not exceed 5% of the total receipt of the business or profession as the case may be. 

What is Presumptive Taxation?

Presumptive taxation scheme lets the taxpayers declare their taxable income at a prescribed rate irrespective of actual profit/gains and in turn relieves them from the burden of maintaining regular books of account and getting the same audited. Presumptive taxation schemes to relieve small taxpayers are provided under Section 44AD, 44ADA and 44AE. While Section 44ADA is for professionals Section 44AD and 44AE concerns small business taxpayers. Let us understand them in detail.

Presumptive Taxation Scheme under Section 44AD, 44AE and 44ADA

Note: Any amount paid by way of advance tax on or before 31st day of March shall also be treated as advance tax paid during the financial year ending on that day.

What If the Taxpayer Wants to Claim Profit Lower than the Prescribed Rate Basis the Actual Earnings and Expenses?

Any person carrying on eligible business or profession under Section 44AD or 44AE or 44ADA and claims profit lower than the prescribed income, is not allowed to enjoy the relief given for maintenance of books of account and audit.

The consequences of claiming lower profit than the prescribed rate are as follows:

Section 44AD – Regular books of accounts are to be maintained if income exceeds the basic exemption limit and an audit shall be carried out if conditions as per provisions of Section 44AB are fulfilled.

Section 44AE – Regular books of account shall be maintained and audit shall be carried out irrespective of turnover or income.

Section 44ADA –  Regular books of accounts are to be maintained and get them audited if income exceeds basic exemption limit.

Is it Compulsory to Opt for a Presumptive Taxation Scheme for a Minimum Number of Years Once Opted in Year 1?

Section 44AD – As per Section 44AD, where a taxpayer opts for presumptive taxation scheme for any of the financial year he is required to continue to opt for the same for next 5 years. If he fails to do so, he will not be eligible to opt for presumptive taxation scheme u/s 44AD for 5 years succeeding the year in which he opts out. Further, with respect to those 5 financial years where taxpayer is ineligible to opt for presumptive taxation scheme u/s 44AD, regular books of account need to be maintained and audit shall be conducted if total income exceeds basic exemption limit. For example, if taxpayer has opted for presumptive taxation under Section 44AD for Year 1 and Year 2 but opts out of it in Year 3, then the taxpayer would not be eligible to opt for presumptive taxation from Year 4 to Year 8 and taxpayer will be required to maintain the books of accounts and get the same audited.

Section 44AE and 44ADA – No such conditions.