Section 44AD of the Income Tax Act, 1961 a presumptive taxation scheme which is introduced to simplify tax compliance for small businesses in India, reducing the burden of maintaining detailed books of accounts and undergoing audits. This section is beneficial for small taxpayers by allowing them to compute their taxable income as a percentage of their turnover thereby streamlining the tax filing process. Below, we will explore the intricacies of Section 44AD including eligibility criteria, tax calculation methods, compliance requirements and recent updates.
Are you interested in pursuing a career in Law? The Legal School in collaboration with IndusLaw has created unique programs for a Certification in Mergers & Acquisitions, Private Equity and Venture Capital Laws, and Certification in Mergers & Acquisitions for fresh law graduates as well as professionals looking to advance in their careers! Enquire now for details!
Detailed Analysis of Section 44AD of the Income Tax Act, 1961
Section 44AD offers a presumptive taxation scheme to ease tax compliance for small businesses in India, allowing them to compute taxable income based on turnover rather than detailed accounting. It applies to resident individuals, HUFs, and partnership firms (excluding LLPs) with turnover not exceeding Rs. 3 Crores for FY 2025-26 (AY 2026-27), provided 95% of receipts are through digital modes. If not, the limit is Rs. 2 Crores. It excludes businesses like transport under Section 44AE. Taxable income is deemed 8% of turnover, or 6% if 95% of receipts are digital. No books of accounts or audits are required, and returns are filed using ITR-4, with 100% advance tax due by March 15th. Once it is chosen, the scheme must be followed for five years, opting out early bars re-entry for five years, ensuring consistency in tax filing.
Background and Purpose
The presumptive taxation scheme under Section 44AD of Income Tax Act, 1961 aims to alleviate the compliance burden on small businesses which forms a significant part of India's economy. By presuming income based on turnover it eliminates the need for extensive bookkeeping, allowing entrepreneurs to focus on business growth rather than tax documentation.
This scheme was introduced to facilitate ease of doing business and encourage entrepreneurship, especially for those with limited resources for maintaining detailed financial records.
Eligibility Criteria
Section 44AD is available to the following taxpayers, provided they meet specific conditions:
Resident Individuals: Indian residents engaged in business.
Hindu Undivided Families (HUFs): Resident HUFs with business income.
Partnership Firms: Resident partnership firms, excluding Limited Liability Partnerships (LLPs).
The key eligibility criterion is the turnover limit:
The total turnover or gross receipts must not exceed Rs. 3 Crores for the financial year 2025-26 (assessment year 2026-27), subject to the condition that 95% of receipts are through digital modes (e.g., account payee cheques, demand drafts, electronic clearing systems). If this condition is not met, the limit is Rs. 2 Crores.
This scheme is not applicable to businesses covered under Section 44AE, such as those involved in plying, hiring, or leasing goods carriages, nor to taxpayers claiming deductions under Sections 10A, 10AA, 10B, 10BA, or 80HH to 80RRB.
For example, a resident individual running a small retail shop with a turnover of Rs. 2.5 Crores, where 95% of receipts are digital, can opt for Section 44AD, but a transport business owner cannot, as it falls under Section 44AE.
Tax Calculation and Presumed Income
Under Section 44AD, the taxable income is computed on a presumptive basis, meaning the profits and gains are deemed to be a fixed percentage of the turnover or gross receipts:
Standard Rate: 8% of the total turnover or gross receipts is deemed as profits and gains, chargeable under the head "Profits and gains of business or profession."
Reduced Rate for Digital Receipts: If 95% of the receipts are through prescribed electronic modes, the rate is reduced to 6% for that portion. For instance, if a business has Rs. 1 Crore turnover with Rs. 95 Lakhs through digital modes, 6% of Rs. 95 Lakhs and 8% of Rs. 5 Lakhs would be considered for income calculation.
This presumptive income includes all deductions allowable under Sections 30 to 38, which are deemed to have been given full effect, and no further deductions are allowed. However, for partnership firms, salary and interest paid to partners can be deducted, subject to the limits specified in Section 40(b).
For example, Mr. Sharma, a resident individual with a turnover of Rs. 1.5 Crores, all through digital modes, would declare Rs. 9 Lakhs (6% of Rs. 1.5 Crores) as taxable income under Section 44AD, without needing to maintain detailed expense records.
Compliance and Filing Requirements
Taxpayers opting for Section 44AD of Income Tax Act, 1961 benefit from simplified compliance:
No Books of Accounts: Eligible taxpayers are not required to maintain detailed books of accounts as per Section 44AA which reduces administrative burden.
No Tax Audit: If the turnover is below the prescribed limits and the taxpayer opts for presumptive taxation, there is no requirement for a tax audit under Section 44AB, saving costs and effort.
ITR Filing: Returns must be filed using Form ITR-4 (Sugam), which is simpler than other forms like ITR-3, and is designed for presumptive income taxpayers.
Advance Tax: Taxpayers must pay 100% of advance tax by March 15th of the relevant assessment year. Failure to do so may attract interest under Sections 234B and 234C.
For instance, a small business owner with presumptive income under Section 44AD must ensure all advance tax is paid by March 15, 2025, for FY 2024-25, to avoid penalties.
Opting In and Restrictions
Once a taxpayer opts for the presumptive taxation scheme under Section 44AD, they must continue with it for five consecutive assessment years. This continuity ensures consistency in tax filing:
If a taxpayer opts out before completing five years (e.g., files ITR-3 for regular business income), they are barred from rejoining the presumptive scheme for the next five years.
For example, if Mr. H opts in for AY 2025-26 and opts out in AY 2026-27, he cannot use Section 44AD again until AY 2031-32.
Also, Learn about Deductions under Section 80C of Income Tax Act, 1961.
Recent Updates and Current Limits
The turnover limit for Section 44AD for FY 2025-26 (AY 2026-27) remains Rs. 3 Crores, provided 95% of receipts are through digital modes.
This limit was increased from Rs. 2 Crores in Budget 2023 effective from FY 2023-24 and no changes were introduced in Budget 2025 regarding this section for resident taxpayers.
The condition for digital receipts aligns with India's push towards a digital economy, incentivizing electronic transactions.
For FY 2024-25 (AY 2025-26), which ended on March 31, 2025, the same limits applied, as confirmed by sources like ClearTax, updated as recently as April 7, 2025. The Finance Bill 2025 introduced a new section, 44BBD, for non-residents in electronics manufacturing, effective from FY 2026-27, but this does not affect Section 44AD for residents.
Practical Implications and Examples
The scheme is particularly advantageous for small businesses and freelancers, as it reduces compliance costs. For instance:
Mr. Uday, with a turnover of Rs. 70 Lakhs, all digital, declares Rs. 4.2 Lakhs (6% of Rs. 70 Lakhs) as income, files ITR-4 and avoids audit.
If Mr. P, with turnover Rs. 2.5 Crores, declares income below 6% (e.g., due to high expenses), and taxable income exceeds the basic exemption limit (Rs. 2.5 Lakhs old regime/Rs. 3 Lakhs new regime for individuals), he may need to maintain books and get audited, as per Section 44AD(4) analysis.
Summary
Section 44AD of the Income Tax Act, 1961, offers a simplified presumptive taxation scheme for small businesses, promoting ease of compliance for resident individuals, HUFs, and partnership firms with turnover up to ₹2 crore (or ₹3 crore if cash transactions are minimal). By presuming 8% (or 6% for digital receipts) of turnover as taxable income, it eliminates the need for detailed bookkeeping and audits and making it cost-effective. However, taxpayers must weigh the inability to claim business expenses or carry forward losses and the 5-year lock-in rule if opting out. It’s an efficient option for eligible small businesses but requires careful consideration of financial circumstances.
Related posts
Section 44AD of Income Tax Act: FAQs
Q1. Do I need to maintain books of accounts if I opt for Section 44AD?
No, taxpayers opting for Section 44AD are exempt from maintaining books of accounts under Section 44AA or getting them audited under Section 44AB, provided they declare income as per the presumptive rates.
Q2. Can I claim business expenses or depreciation under Section 44AD?
No, you cannot claim deductions for business expenses, depreciation, or unabsorbed losses, as the presumptive income is deemed to cover all such costs. However, deductions under Chapter VI-A (e.g., Section 80C, 80D) are allowed.
Q3. What is the turnover limit for Section 44AD?
The turnover limit is ₹2 crore. However, it extends to ₹3 crore if cash receipts and payments do not exceed 5% of total receipts and payments in the previous year (as per Finance Act, 2023).
Q4. Can I opt out of Section 44AD after choosing it?
Yes, opting for Section 44AD is voluntary. However, if you opt out after choosing it, you cannot avail of this scheme for the next 5 assessment years, and you must maintain books of accounts and get them audited if your income exceeds the basic exemption limit.
Q5. Is advance tax applicable under Section 44AD?
Yes, taxpayers must pay 100% of their advance tax liability by 15th March of the financial year, instead of quarterly installments.
