Section 44AD - Presumptive Scheme for Businesses

The presumptive taxation scheme under section 44AD gives relief to small taxpayers having business income up to Rs. 2 Crores. If the cash receipts during the year falls within 5% of the total revenue, business having turnover up to Rs. 3 crore can opt for presumptive taxation. 

One of the key advantages of presumptive taxation is that you're not required to maintain books of accounts. Section 44AD allows taxpayers to calculate profit as a percentage of their turnover i.e., 6% & 8% depending on the nature of receipts.

Taxpayers engaged in any business of plying, hiring, and leasing referred to in section 44AE are not eligible for presumptive taxation under section 44AD. Taxpayers who have professional income can opt for the presumptive scheme as referred to in Section 44ADA.

Who is Eligible to Opt for Presumptive Taxation Under Section 44AD?

• Any individual resident
• Resident partnership firms ( except for Limited Liability Partnership Firms LLP)
• Resident Hindu Undivided Families (HUFs)

can avail the benefits of the scheme of presumptive taxation under Section 44AD provided annual turnover or gross receipts does not exceed the prescribed limit in the previous financial year.

Presumptive Taxation Limits

Business can opt for presumptive taxation for FY 2024-25 (AY 2025-26) if the turnover does not exceed the following limits.

If they opt for presumptive taxation :

• The profits are calculated at 8% of your turnover 
• If the cash receipts do not exceed 5% of the total receipts and cash payments do not exceed 5% of the total payments, the profits are calculated at 6% of the total turnover.

Benefits of Presumptive Taxation Scheme

1. You don’t have to maintain accounting records.
2. You don’t have to get your accounting records audited.
3. Assessee opting for presumptive taxation has to pay 100% advance tax by 15th March of that particular financial year. Prior to FY 2016-17 you don’t have to pay advance tax.
4. You can file your tax return in ITR-4 in a much shorter and simpler form than     ITR-3.

Professionals have also been added to the ambit of presumptive taxation. However, the time limit of 5 years condition applies only to businesses.

Conditions for Section 44AD

In an interesting move, a new condition was  taxpayers opting for presumptive income, i.e. –

You stand to lose presumptive tax benefits, if you do not continue them for at least 5 years.

Details of the additional condition

This additional condition has been added by substituting sub-section (4) of 44AD which is – If you are opting for the presumptive scheme, you must-

a. Declare your profits as per the presumptive scheme for at least 5 years in continuation.

b. If you decide to show and file profits as per regular business (ITR-3) before the end of these 5 years, you will lose presumptive benefits and be disallowed from presumptive taxation for the subsequent 5 years.

For example, Mohan has opted for a scheme for the AY 2025-2026 so Mohan is required to continue that scheme for next 5 AYs. i.e. from AY 2026-2027 to AY 2031-2032. If Mohan does not opt for the scheme in AY 2026-2027, then he is not eligible to opt for the scheme for the next 5 A.Y. i.e. AY 2027-2028 to AY 2032-2033.

Please note that 5 years shall be counted starting the year in which you first file usual taxes (ITR-3) for such business. The government is discouraging the taxpayers who misuse the scheme and constantly change their options often. 

So if you opt for a presumptive scheme, continue for 5 years and if you want to opt-out, you’ll be barred from resuming with the presumptive scheme for a period of 5 years. Further it is revised to Rs.3 crores provided cash receipts should be less than 5% of total turnover.

Restrictions for Opting Presumptive Scheme 

The restrictions that the taxpayer couldn’t opt for the presumptive income scheme for five years will be applicable only when he declares the profits lower than 8% or 6%. If, because of any other reasons, he cannot opt for a presumptive income scheme, then restrictions of Section 44AD(4) do not apply.

Let us understand the condition with an illustration:

In FY 2024-25, the turnover of Mr H was Rs 1.5 crore. He declares his income Rs 12 lakh and opts for a presumptive income scheme under section 44AD. The turnover of Mr H for FY 2025-26 is Rs 3.1 crore, and for FY 2026-27 is Rs 1.9 crore. Is it possible to opt for section 44AD in FY 2027-28? 

Section 44AD(4) will attract the year when the assessee declares the profits less than 8% or 6%. The taxpayer will not be eligible to opt for a presumptive income scheme for the next five years. 

However, section 44AD(4) will not apply when the taxpayer cannot opt for the presumptive schemes due to non-eligibility. For example, gross turnover exceeding the presumptive scheme limit (i.e. Rs 2 crore or Rs 3 crore as applicable), the taxpayer’s business does not qualify for a presumptive scheme, etc. 

In such conditions, even if Mr H declares income as per normal provisions (not presumptive scheme) in the FY 2025-26, he can opt for the presumptive scheme in the FY 2027-28.

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Maintenance of Books of Accounts and Tax Audit

If the taxpayer cannot opt for a presumptive income scheme for the five years, i.e. he has not complied with section 44AD(4), and his total income exceeds the amount not chargeable to tax, he is liable to maintain books of accounts.

For better understanding, let us take the example of Mr P. 

Mr P runs a sole proprietorship firm, and his gross turnover is Rs 2.5 crore during the FY 2023-24. He opts for presumptive income first time during the FY 2023-24 by declaring profits above 8 per cent.

In FY 2024-25, his turnover is Rs 2.7 crore, but he decides to declare profits below 8 per cent and compute income as per regular provisions of business (i.e. claiming all the expenditures). 

After computation, his taxable income is Rs 8 lakhs, i.e. above the basic exemption limit. Is he liable to maintain books of accounts and tax audits?

Since Mr. P declares income less than that defined in the presumptive income scheme during the FY 2024-25, he opts to report his income as per regular computation. Hence, he is not eligible to opt for a presumptive scheme for five years. 

In any of these five years, if his taxable income exceeds the basic exemption limit, he is liable to maintain books of accounts and do a tax audit for the relevant financial year.

Hence, during the financial year 2024-25, he did not comply with section 44AD(4), and his taxable income is above the basic exemption limit. He must maintain books of accounts of his business and will be liable for a tax audit.

Note: 

• The liability of tax audit is required in two types of cases (for business income other than 44AE,44BB and 44BBB)-
  • In normal cases (regular business income computation), if the total turnover of the taxpayer exceeds Rs 1 crore, irrespective of profits percentage.
  • When section 44AD(4) applies, and in addition, the total income exceeds the basic exemption limit.
• The basic exemption limit for individuals is Rs 2.5 lakh(old regime) or Rs 3 lakh(new regime), whereas it is nil income for firms and companies.