Section 44AD: Presumptive Taxation for Small Businesses

What is Section 44AD?

Section 44AD allows eligible small businesses to calculate their income on a presumptive basis, rather than following the regular method of accounting. Under this scheme, businesses with a turnover or gross receipts up to ₹ 2 crore are allowed to declare their income at a fixed rate of 8% of their turnover or receipts. If the business accepts digital payments (such as bank transfers, credit/debit cards, or electronic clearing systems), the rate is reduced to 6%. The reduction in tax rates for businesses adopting digital payments is designed to encourage cashless transactions and further drive the government’s agenda of promoting digitalization in business transactions.

By offering a simplified tax calculation method, Section 44AD eliminates the need for small businesses to maintain extensive books of accounts, which often involves costly accounting services and time-consuming record-keeping. Additionally, businesses opting for this scheme are not required to get their accounts audited, saving both time and money that would otherwise be spent on audit fees.
 

Eligibility for Section 44AD

To qualify for Section 44AD, businesses must meet specific eligibility criteria:

Eligible Taxpayers: This scheme is available to individual taxpayers, Hindu Undivided Families (HUFs), and resident partnership firms. It is important to note that Limited Liability Partnerships (LLPs) are not eligible to avail of the benefits under Section 44AD.

Eligible Businesses: The scheme applies to businesses with annual turnover or gross receipts of up to ₹ 2 crore. However, the turnover limit increases to ₹ 3 crore if 95% or more of the business’s receipts are made through digital means (such as bank transfers, credit cards, and mobile payments).

Exclusions: Not all types of businesses are eligible for the presumptive taxation scheme under Section 44AD. Some excluded businesses include:

• Businesses involved in hiring, leasing, or plying goods carriages.
• Commission-based businesses, such as brokers and consultants, who fall under other presumptive taxation schemes like Section 44ADA.
• Businesses claiming deductions under provisions such as Section 10A, 10AA, or 10B for certain tax exemptions.
   

Key Features of Section 44AD

Section 44AD offers several attractive features for small businesses that simplify tax compliance:

Simplified Tax Calculation: The primary benefit of Section 44AD is the simplified tax calculation. Businesses are required to declare their income at a fixed rate of 8% of the total turnover or gross receipts, which can be calculated easily. For businesses that receive payments digitally, the income is calculated at a reduced rate of 6%, promoting cashless transactions.

No Requirement for Books of Accounts: One of the most appealing aspects of Section 44AD is that businesses opting for this scheme are not required to maintain detailed books of accounts. Regular businesses are expected to keep track of their financial transactions, but under this scheme, small businesses can avoid this cumbersome process. This reduces the workload on business owners, allowing them to focus more on running their business instead of dealing with complex accounting.

Exemption from Audit: Unlike the standard tax regime, businesses under Section 44AD are not required to undergo an audit of their financial accounts, as specified under Section 44AB of the Income Tax Act. This eliminates the need for audit fees and further reduces the administrative burden for small business owners.

No Advance Tax Instalments: Typically, businesses are required to pay advance tax in four instalments during the financial year. However, under Section 44AD, businesses do not need to make advance tax payments in quarterly instalments. Instead, they are required to pay the entire tax liability in one go by 15th March of the financial year, making the tax payment process simpler and more manageable.

Income Declaration Flexibility: While the scheme prescribes a fixed rate for declaring income (8% for cash transactions or 6% for digital payments), businesses can choose to declare a higher income if they wish. If a business opts to declare a higher income than the presumptive amount, it will be subject to the regular taxation rules applicable under the Income Tax Act.

Exemption from Regular Deductions: Businesses opting for the presumptive taxation scheme under Section 44AD are not allowed to claim regular deductions under Sections 30 to 37 of the Income Tax Act, such as depreciation on assets, rent, or repairs. However, businesses are still allowed to claim deductions for interest paid to partners as per Section 40(b).
 

How is Income Computed Under Section 44AD?

The income under Section 44AD is computed based on a fixed percentage of the turnover or gross receipts:

• 8%: If the business receives payments in cash or cheque, income is computed at 8% of the total turnover or gross receipts.
• 6%: If payments are received digitally (through bank transfers, credit cards, or other digital modes), the income is computed at 6% of the total turnover.

For example, if a business has a turnover of ₹ 80 lakh, under Section 44AD, the presumptive income will be ₹ 6.4 lakh (8% of ₹ 80 lakh). If 95% of the turnover is received through digital means, the presumptive income will be ₹ 4.8 lakh (6% of ₹ 80 lakh).
 

Restrictions Under Section 44AD

While the scheme offers several benefits, there are certain restrictions and conditions:

No Deductions for Certain Expenses: As mentioned earlier, businesses opting for Section 44AD cannot claim deductions for certain expenses like depreciation and repairs under Sections 30 to 37 of the Income Tax Act. However, interest paid to partners can still be claimed.

Five-Year Commitment: Once a business opts for Section 44AD, it is required to stay in the scheme for a minimum of five years. If the business opts out before completing five years, it will not be eligible to join the scheme again for the next five years.

Ineligibility for Certain Professions: Commission-based businesses or professionals, such as brokers and consultants, cannot avail themselves of the benefits of Section 44AD. Instead, these professionals can opt for the similar scheme available under Section 44ADA.
 

Section 44AD for Non-Residents (Budget 2025 Update)

The Union Budget 2025 introduced an update to Section 44AD, expanding its scope to include non-resident businesses in India involved in electronic manufacturing. This move is aimed at encouraging foreign investment in India’s electronics sector by simplifying tax compliance for non-resident businesses.
 

Conclusion

Section 44AD offers a simple and efficient tax regime for small businesses, allowing them to declare income based on a fixed percentage of their turnover without the need for maintaining detailed books of accounts or undergoing audits. This scheme reduces compliance costs and simplifies the tax filing process, making it an ideal option for small entrepreneurs, shop owners, traders, and service providers. By promoting digital payments and offering a straightforward way to calculate taxes, Section 44AD is a valuable tool for small businesses in India to stay compliant and focus on growth.