Section 44AD – Presumptive Taxation Scheme for Businesses

The presumptive taxation scheme enables eligible taxpayers to declare their business or professional income at a prescribed percentage of their turnover, thereby reducing compliance requirements.

Under Section 44AD, resident taxpayers engaged in eligible businesses can declare their taxable income at 8% of total turnover where receipts are primarily in cash. However, if cash receipts do not exceed 5% of total receipts, the scheme allows taxpayers with a turnover of up to ₹3 crore to declare income at a lower rate of 6% on digitally received turnover. In other cases, the turnover limit remains ₹2 crore.

Section 44ADA – Presumptive Taxation Scheme for Professionals

Under Section 44ADA, eligible professionals can opt for presumptive taxation by declaring 50% of their gross receipts as taxable income, provided their total gross receipts do not exceed ₹75 lakh during the financial year.

This provision simplifies tax compliance for small professionals by eliminating the requirement to maintain detailed books of accounts and undergo tax audit, subject to prescribed conditions.

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

The presumptive taxation scheme under Section 44AD is available to the following resident taxpayers:

1. Resident individuals
2. Resident partnership firms (excluding Limited Liability Partnership firms – LLPs)
3. Resident Hindu Undivided Families (HUFs)

These eligible taxpayers can opt for the scheme provided their annual turnover or gross receipts do not exceed the prescribed limit during the relevant previous financial year.

What Are The Presumptive Taxation Threshold Limits?

Businesses can opt for presumptive taxation for FY 2025-26 (AY 2026-27) 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 the Presumptive Taxation Scheme

1. No requirement to maintain detailed books of accounts
2. No mandatory tax audit of accounting records
3. Taxpayers opting for presumptive taxation are required to pay 100% of advance tax by 15th March of the relevant financial year (earlier, advance tax was not applicable before FY 2016–17)
4. Simplified income tax return filing through ITR-4, which is shorter and easier compared to ITR-3
5. Professionals are also covered under the presumptive taxation scheme; however, the five-year lock-in condition applies only to businesses under Section 44AD.

Conditions for Opting Presumptive Taxation Under Section 44AD

To prevent misuse of the presumptive taxation scheme, the Income Tax Act introduces a continuity condition for taxpayers opting under Section 44AD.

Key Condition: Five-Year Lock-In Period

Taxpayers opting for presumptive taxation under Section 44AD are required to continue the scheme for a minimum of five consecutive assessment years.

If a taxpayer opts out of the presumptive scheme before completing five years, the presumptive taxation benefits will be withdrawn, and the taxpayer will be barred from re-entering the scheme for the next five assessment years.

Details of the Additional Condition Under Section 44AD(4)

Section 44AD(4) provides that a taxpayer opting for presumptive taxation must comply with the following:

1.     Continuous Declaration:
Profits must be declared in accordance with the presumptive taxation provisions for at least five consecutive assessment years.

2.     Early Exit Consequence:
If the taxpayer declares income under the normal provisions (by filing ITR-3) before completing the five-year period, the taxpayer:

1. Loses the presumptive taxation benefit, and
2. Becomes ineligible to opt for Section 44AD for the subsequent five assessment years.

Illustration

Mohan opted for the presumptive taxation scheme under Section 44AD for AY 2026–27. Accordingly, he is required to continue the scheme for the next five assessment years, i.e., from AY 2027–28 to AY 2031–32.

If Mohan chooses not to opt for the presumptive scheme in AY 2027–28 and instead files his return under normal provisions, he will not be eligible to opt for Section 44AD for the next five assessment years, i.e., from AY 2028–29 to AY 2032–33.

Important Note:
The five-year restriction period is counted from the assessment year in which the taxpayer first files the return under normal provisions after opting out of the presumptive scheme.

This provision discourages frequent switching between presumptive and regular taxation to gain undue tax advantages.

Revised Turnover Limit

The turnover threshold for opting under Section 44AD has been enhanced to ₹3 crore, provided that cash receipts do not exceed 5% of the total turnover during the financial year.

Restrictions on Re-Entering the Presumptive Scheme

The five-year restriction under Section 44AD(4) applies only when the taxpayer voluntarily declares profits lower than the prescribed presumptive rate of 8% or 6%, as applicable.

However, this restriction does not apply in cases where the taxpayer becomes ineligible to opt for the presumptive scheme due to reasons such as:

• Turnover exceeding the prescribed limit (₹2 crore or ₹3 crore, as applicable)
• Nature of business not qualifying under Section 44AD
• Other statutory disqualifications

Illustration for Better Understanding

In FY 2025–26, Mr. H has a turnover of ₹1.5 crore and declares income of ₹12 lakh under the presumptive taxation scheme under Section 44AD.

In FY 2026–27, his turnover increases to ₹3.1 crore, exceeding the prescribed limit, making him ineligible to opt for presumptive taxation for that year. He therefore files his return under normal provisions.

In FY 2027–28, his turnover falls to ₹1.9 crore, bringing him back within the eligibility limit.

In this case, Section 44AD(4) will not apply, and Mr. H can opt for the presumptive taxation scheme again in FY 2027–28, since the earlier opt-out was due to ineligibility, not voluntary exit.

Maintenance of Books of Accounts and Tax Audit under Section 44AD

Where a taxpayer fails to comply with the conditions of Section 44AD(4) and is consequently not eligible to opt for the presumptive taxation scheme for five assessment years, the law imposes additional compliance requirements.

If, during any of these years, the taxpayer’s total income exceeds the basic exemption limit, the taxpayer is required to maintain proper books of accounts and get the accounts audited, as applicable.

Illustration for Better Understanding

Mr. W operates a sole proprietorship business with a gross turnover of ₹2.5 crore in FY 2024–25. He opts for the presumptive taxation scheme for the first time in FY 2024–25 by declaring profits at a rate higher than 8%.

In FY 2025–26, his turnover increases to ₹2.7 crore. However, he chooses to declare profits below the prescribed presumptive rate and computes his income under the regular provisions of business income, claiming actual expenses. After computation, his taxable income amounts to ₹8 lakh, which exceeds the basic exemption limit.

Applicability of Books of Accounts and Tax Audit

Since Mr. W declared income lower than the presumptive rate in FY 2025–26, he opted out of the presumptive taxation scheme and, therefore, did not comply with Section 44AD(4). As a result:

         i.            He becomes ineligible to opt for the presumptive taxation scheme for the next five assessment years, and

        ii.            As his taxable income exceeds the basic exemption limit, he is mandatorily required to maintain books of accounts and get his accounts audited for the relevant financial year.

Accordingly, for FY 2025–26, Mr. W must maintain proper books of accounts and will be liable for a tax audit.

Notes on Tax Audit Applicability

Tax audit requirements (for business income other than Sections 44AE, 44BB, and 44BBB) arise in the following situations:

1.     Normal Business Computation:
Where income is computed under regular provisions and total turnover exceeds ₹1 crore, irrespective of the profit percentage.

2.     Cases Covered by Section 44AD(4):
Where the taxpayer becomes ineligible for presumptive taxation under Section 44AD(4) and the total income exceeds the basic exemption limit.

Basic Exemption Limit

• Individuals:

                                i.            ₹2.5 lakh under the old tax regime

                              ii.            ₹4 lakh under the new tax regime

• Firms and Companies:

                                i.            No basic exemption limit (taxable from the first rupee of income)