Section 44AD of Income tax act

Section 44AD – Presumptive Taxation

Section 44AD of the Income-tax Act, 1961 provides a presumptive taxation scheme for eligible small businesses. Instead of calculating actual business profit after maintaining detailed books, the assessee can declare income at the prescribed percentage of turnover/gross receipts.

1. Who can opt for Section 44AD?

Generally, the following resident taxpayers can opt:

• Individual
• HUF
• Resident partnership firm other than LLP

The business can be any eligible business, subject to the exclusions under the section.

2. Turnover limit

For the current provisions:

SituationMaximum turnover/gross receiptsCash receipts do not exceed 5% of total turnover/gross receipts₹3 croreOtherwise₹2 crore

The Income Tax Department specifically confirms the ₹3 crore threshold where cash receipts are within the 5% condition.

3. Presumptive income rate

Normally:

• 8% of turnover/gross receipts for receipts other than specified digital/account-payee modes.
• 6% for turnover/gross receipts received through account-payee cheque/draft, electronic clearing system or prescribed electronic modes.

The assessee can also declare a higher income than 6%/8%.

Example:

Suppose business turnover = ₹1 crore

• ₹80 lakh received through banking/digital modes → 6% = ₹4,80,000
• ₹20 lakh received in other modes → 8% = ₹1,60,000

Presumptive business income = ₹6,40,000

4. Expenses and depreciation

Under 44AD, deductions under sections 30 to 38 are deemed to have already been allowed. Therefore, separate deduction for normal business expenses and depreciation is generally not available after applying the presumptive rate.

However, in the case of a partnership firm, partner salary and interest can be deducted subject to the limits and conditions of section 40(b).

5. Who cannot use 44AD?

Section 44AD does not apply to, among others:

• Business of plying/hiring/leasing goods carriages covered by section 44AE
• Agency business
• Income in the nature of commission or brokerage
• Specified professions covered by section 44AA(1), which may fall under section 44ADA
• LLPs
• Non-residents

The Income Tax Department also specifically lists agency business and commission/brokerage income among the exclusions.

6. Books of accounts and tax audit

If an eligible assessee declares income at or above the prescribed 6%/8% rate, the presumptive scheme generally provides relief from maintaining books and audit for that business.

But if the assessee declares lower profit than the prescribed presumptive percentage, and the other statutory conditions are met, the books and tax-audit requirements under sections 44AA/44AB can become applicable.

7. Important point for your tax practice

If you are dealing with a goods trading/business case, 44AD may generally be applicable if the assessee is an eligible resident Individual/HUF/Firm and the turnover is within the prescribed limit.

If it is professional income, such as accountancy, legal, medical, engineering, technical consultancy etc., 44AD is not the correct section; section 44ADA needs to be examined.