Section 44AD: The Definitive Guide to Presumptive Taxation for Small Businesses (FY 2025-26)
The Indian Income-tax Act, 1961, is often perceived as a maze of complex compliance and exhaustive bookkeeping. However, for small business owners, Section 44AD stands as a beacon of simplicity. By opting for the Presumptive Taxation Scheme, eligible taxpayers can shift their focus from accounting entries to business growth.
In this guide, we break down the eligibility, the recent hike in turnover limits, and the critical “lock-in” rules every entrepreneur must know.
1. What is the Presumptive Taxation Scheme?
Under normal provisions, a business must maintain detailed books of account and get them audited if turnover exceeds specific limits. Section 44AD allows eligible taxpayers to declare a “presumptive” percentage of their turnover as profit, regardless of actual expenses.
2. Who Can Opt for Section 44AD?
The scheme is designed for:
- Resident Individuals
- Hindu Undivided Families (HUFs)
- Partnership Firms (excluding Limited Liability Partnerships or LLPs)
Note: This scheme is NOT available to professionals (who are covered under 44ADA), persons earning commission/brokerage, or those carrying on agency businesses.
3. The New Turnover Limits: ₹2 Crores vs. ₹3 Crores
The Finance Act has introduced a significant boost for digital businesses.
- General Limit: The scheme applies to businesses with a turnover of up to ₹2 Crores.
- Enhanced Limit: For the current assessment year, the limit is increased to ₹3 Crores, provided that the aggregate cash receipts during the year do not exceed 5% of the total turnover.
4. Presumptive Profit Rates
The profit is calculated based on how you receive your payments:
- 6% of Turnover: For receipts via digital modes (Account Payee Cheque, Bank Draft, ECS, or other electronic modes) received before the due date of filing the return.
- 8% of Turnover: For receipts in cash or non-digital modes.
5. The “No Deduction” Rule
When you opt for Section 44AD, the deemed profit is considered final. You cannot claim further deductions under Sections 30 to 38, including depreciation. However, the written down value (WDV) of assets will be calculated as if depreciation had been allowed.
6. The 5-Year Lock-in Rule (Critical Compliance)
If an assessee opts for Section 44AD but decides to declare profits as per regular books in any of the subsequent 5 assessment years, they become ineligible to claim the benefit of Section 44AD for the next 5 years. Furthermore, if their income exceeds the basic exemption limit, they must maintain books and undergo a mandatory tax audit under Section 44AB.
Section 44AD is an excellent tool for reducing the compliance burden, especially for businesses moving toward a digital-first model. However, the decision to opt-in should be made after analyzing actual profit margins and long-term business plans.
Q1. Is GST registration mandatory if I opt for Section 44AD?
No, opting for Section 44AD does not automatically make GST registration mandatory. GST registration depends on your total turnover exceeding the prescribed thresholds (usually ₹40 lakhs for goods and ₹20 lakhs for services in most states). However, ensure your turnover for both Income Tax and GST is reconciled to avoid scrutiny.
Q2. Can I claim my home loan interest or 80C deductions if I file under 44AD?
Yes. While you cannot claim business-related expenses (like rent or electricity) under Section 44AD, you are still eligible to claim Chapter VI-A deductions (such as Section 80C, 80D, etc.) and deductions for interest on a home loan from your Total Income.
Q3. What happens if my actual profit is more than 8%?
The 6% or 8% rates are the minimum required to be declared to stay in the scheme. If your actual profit is higher (say 15%), you can voluntarily declare the higher amount. Declaring significantly lower than actual profits can lead to issues during assessment if your lifestyle or investments do not match the declared income.
Q4. I am a Freelance Software Consultant. Can I use Section 44AD?
No. Software consultancy is considered a “specified profession” under Section 44AA(1). Therefore, you must use Section 44ADA, where the presumptive profit rate is 50% of gross receipts, provided your receipts are within the ₹50 lakh (or ₹75 lakh digital) limit.
Q5. Does the ₹3 Crore limit apply if I have some cash sales?
The enhanced limit of ₹3 Crores applies only if your cash receipts are 5% or less of your total turnover. If your cash receipts exceed this 5% threshold, the eligibility limit reverts to ₹2 Crores.
Q6. Is an Audit mandatory if I opt out of the 5-year cycle?
Yes, but only if your total income exceeds the basic exemption limit. If you were under 44AD last year but opt for regular filing this year (declaring less than 6%/8% profit), you must maintain books of account and get a Tax Audit under Section 44AB.