Section 44AD - Presumptive Taxation for Business

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Sakshi Shah

Business and Profession Income
Presumptive Taxation Scheme
Section 44AD
Last updated on June 21st, 2022

To provide relief to small taxpayers from the tedious task of maintaining books of accounts and getting books of accounts audited, the CBDT had introduced the Presumptive Taxation Scheme. Section 44AD is the presumptive taxation scheme for business. A business with turnover up to INR 2 Crore can take the benefit of presumptive taxation under Section 44AD.

Who can opt for Presumptive Income under Section 44AD?

The following taxpayers engaged in any business can opt for the Presumptive Taxation Scheme under Section 44AD.

The following taxpayers cannot opt for the Presumptive Taxation Scheme under Section 44AD.

Calculation of Presumptive Income under Section 44AD

To opt for Presumptive Taxation Scheme under Section 44AD, the following two conditions should be satisfied:

  1. The gross sales or turnover of the business should be less than or equal to INR 2 Crore.
  2. The taxpayer should report 6%/8% or more of the gross sales or turnover as income in the ITR.

Note: The prescribed rate of 8% is for non-digital transactions in the business and the rate of 6% is for digital transactions in the business.

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Example

Akshay runs a trading business. The gross sales for FY 2019-20 are INR 1.8 Crore. Sales include cash payments of INR 80 lacs and non-cash payments of INR 1 Crore. Total Purchases are of INR 50 lacs. The total expenses are INR 20 lacs that includes a salary, rent, electricity, maintenance, travelling, etc. Can he opt for the Presumptive Taxation Scheme under Section 44AD?

Since the gross sales are less than INR 2 Crore, Akshay can opt for Presumptive Taxation Scheme under Section 44AD.

Income Tax on Presumptive Income under Section 44AD

Tax Audit and Books of Accounts for Presumptive Income under Section 44AD

Check Tax Audit Applicability u/s 44AB
Check Income Tax Audit applicability u/s 44AB to file Tax Audit Report Form 3CB - 3CD with your Income Tax Return.
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Check Tax Audit Applicability u/s 44AB
Check Income Tax Audit applicability u/s 44AB to file Tax Audit Report Form 3CB - 3CD with your Income Tax Return.
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Section 44AD of Income Tax – 5 Year Rule

As per this rule, if a taxpayer opts for the presumptive taxation scheme in a financial year, he/she should opt for it for the next 5 financial years continuously. However, if the taxpayer fails to do so, he/she would not be able to take the benefit of presumptive taxation scheme for the next 5 financial years. For eg: A professional opts for Sec 44AD for AY 2018-19 and AY 2019-20. However, for AY 2020-21, he does not opt for the presumptive taxation scheme. In this case, he will not be eligible to claim the benefit of the presumptive taxation scheme for the next five AYs, i.e. from AY 2021-22 to AY 2025-26.

FAQs

Do I need to pay advance tax if I opt for the Presumptive Taxation Scheme under Section 44AD?

Yes. If the total tax liability for a financial year exceeds INR 10,000, you must pay advance tax. If you have opted for presumptive taxation scheme u/s 44AD or 44ADA, you are required to pay advance tax on or before 15th March instead of 4 installments in other cases. However, if you fail to pay advance tax by 15th March of the financial year, interest is Sec 234B and Sec 234C is required to be paid.

Do I need to maintain books of accounts if I opt for the Presumptive Taxation Scheme under Section 44AD?

A person engaged in a business having gross sales or turnover up to INR 2 Cr has the option to opt for the Presumptive Taxation Scheme under Sec 44AD. He/she can report 6%/8% or more of gross receipts as income and pay tax on it. If they opt for Presumptive Taxation, they are not required to maintain books of accounts as per Section 44AA. They are also not liable for Tax Audit as per Section 44AB.

Got Questions? Ask Away!

  1. Hi @Sankar123,

    Following are the benefits of filing under 44ADA:

    1. Taxpayer does not need to maintain books of accounts as per section 44AA,
    2. Taxpayer does not need to pay advance tax each quarter and can pay it in last installment i.e, by 15th march of the financial year,
    3. Tax audit will not be applicable if professional income is shown under 44ADA,
    4. Taxpayers can file ITR-4 which is simpler than ITR-3.

    However, as per section 44ADA, a taxpayer needs to show a minimum 50% of gross receipt or a higher amount claimed to have been earned as income while opting for 44ADA.

    Hope this helps :slightly_smiling_face:

  2. Sec 44ada professional income it return filed person gross receipts rs:15 lacs and rebate sec80c lic premium pay amount rs:50000/- in f.y.20-21
    Question:
    Assess it return filed benefit for new or old scheme in it act.

  3. Hey @Sundaraiah_Kollipara, you can find out whether you would be benefitting using the old tax regime or the new one using the income tax calculator:

  4. Hi @Akila_S, in case you have a presumptive income along with capital gains you will need to file ITR-3. With Quicko, you don’t have to worry about choosing an ITR, our engines will help you choose what suits you best.

    .

  5. Hi @Sudipta_Guru , it is required that you show minimum 6% of turnover. If you earn profits higher than 6% of your turnover you will have to show that profit. You can read up more on how to accommodate your profits under Section 44AD in the following article. Will be happy to help if you face any further hurdles. :blush:

  6. (1) When should one go for 44 AD and when to go for 44 ADA ?
    (2) Why shouldn’t a normal professional having income upto 50 Lakh, file taxes under 44 AD (where taxable income will be 6% = 3 Lakh) rather than opting for 44 ADA (50% of gross receipts will be taxable = 25 lakh) ?

  7. Hey @ashish_shah

    1. 44AD - can be opted in case of business income…, whereas (Profit: 6 or 8%)
      44ADA - can be opted in case of professional income. (Profit: 50%)

    2. Depending upon whether profits/gains is from Business or Profession 44AD or 44ADA will be applicable respectively.

    Hope this helps. :slight_smile:

  8. @vinith.r
    Let’s say, if a person is freelancing and his income is say 50 Lakh.
    Will such income be considered business income or professional income?

  9. @ashish_shah

    Freelancers can opt for Presumptive taxation scheme under Section 44ADA.

    Feel free to ask if you need any further help.

    Cheers!

  10. @vinith.r what if a freelancer forms a proprietorship?
    can then he skip 44ADA and use 44AD?

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