Presumptive Taxation

For small taxpayers, the Income-tax Act, 1961 has framed presumptive taxation schemes as given below:

Section 44AD  :  Computation of income on estimated basis in the case of taxpayers [being a resident individual, resident Hindu undivided family or resident partnership firm (not being a limited liability firm] engaged in certain business subject to certain conditions.

Presumptive taxation for businesses is covered under section 44AD of the income tax act. Any business which has a turnover of less than Rs 2 crore can opt to be taxed presumptively. They must declare profits of 8% for non-digital transactions or 6% for digital transactions, whichever one is applicable.

The presumptive taxation scheme of section​ 44AD can be adopted by following persons :

1) Resident Individual

2) Resident Hindu Undivided Family

3) Resident Partnership Firm (not Limited Liability Partnership Firm)

In other words, the scheme cannot be adopted by a non-resident and by any person other than an individual, a HUF or a partnership firm (not Limited Liability Partnership Firm).

Further, this Scheme cannot be adopted by a person who has made any claim towards deductions under section 10A/10AA/10B/10BA or under  sections 80HH to ​80RRB in the relevant year. ​

The scheme of   section 44AD is designed to give relief to small taxpayers engaged in any business, except the following businesses:

• • Business of plying, hiring or leasing goods carriages referred to in sections 44AE.
  • A person who is carrying on any agency business.
  • A person who is earning income in the nature of commission or brokerage
  • Any business whose total turnover or gross receipts exceeds two crore rupees.​

• However, if the amount of cash received during the previous year does not exceed 5% of the total turnover or gross receipt of such year then the threshold limit for total turnover or gross receipt shall be taken as Rs. 3,00,00,000 instead of Rs. 2,00,00,000. The receipts through the mode of cheque or a bank draft which is not an account payee, shall be considered a receipt in cash for this purpose. [Applicable w.e.f. Assessment Year 2024-25]

• In case of a person engaged in a business and opting for the presumptive taxation scheme of section 44AD, the provisions of section 44AA  relating to maintenance of books of account will not apply. In other words, if a person adopts the provisions of section 44AD and declares income @ 8%/6% of the turnover, then he is not required to maintain the books of account as provided under section 44AA in respect of business covered under the presumptive taxation scheme of section 44AD​.​

• If a person opts for presumptive taxation scheme then he is also require to follow the same scheme for next 5 years. If he failed to do so, then presumptive taxation scheme will not be available for him for next 5 years. [For example, an assessee claims to be taxed on presumptive basis under Section 44AD for AY 2019-20. For AY 2020-21 and 2021-22 also he offers income on basis of presumptive taxation scheme. However, for AY 2022-23, he did not opt for presumptive taxation Scheme. In this case, he will not be eligible to claim benefit of presumptive taxation scheme for next five AYs, i.e. from AY 2023-24 to 2027-28​.] He is required to keep and maintain books of account and he is also liable for tax audit as per section 44AB from the AY in which he opts out from the presumptive taxation scheme. [If his total income exceeds maximum amount not chargeable to tax]​