Section 44AD: Presumptive Taxation for Small Businesses & Traders

Ordinarily, business income is actual revenue minus actual expenses, which means maintaining books, tracking every expense, and — above certain thresholds — a tax audit. Presumptive taxation replaces all of that with a formula: a fixed percentage of your turnover is your taxable income, and no proof of expenses is needed.

The scheme is available to:

Who cannot use it — an important trap: LLPs are excluded, and so are companies and non-residents. Many small businesses reflexively register as an LLP for the liability protection, without realising they have given up the 44AD option entirely. If presumptive taxation matters to you, factor it into your choice of structure at the outset.

Certain businesses are also outside the scheme: those covered by Section 44AE (plying, hiring, or leasing goods carriages), agency businesses, and those earning income by way of commission or brokerage. Professionals listed under Section 44AA(1) use Section 44ADA instead.

For FY 2025-26 (AY 2026-27):

The higher limit rewards businesses that operate digitally. If your cash receipts cross 5%, your eligibility reverts to the ₹2 crore limit.

Your presumptive income depends on how you were paid, not on how you invoiced:

A business with mixed receipts applies each rate to the relevant portion.

Two things to note. First, 6% and 8% are minimums — you may voluntarily declare a higher income, and should if your real profit is clearly higher, since declaring far less than your evident lifestyle or investments suggest can invite scrutiny. Second, the arithmetic cuts both ways: if your actual margin is below the deemed rate, you'll pay tax on profit you never made.

Opting for 44AD means no further deduction for business expenses under Sections 30 to 38 — rent, salaries, electricity, repairs, and depreciation are all deemed already accounted for in the 6%/8% figure. Importantly, depreciation is deemed to have been allowed, so the written-down value of your assets must still be reduced each year, even though you never claimed it. That matters when you eventually sell an asset or exit the scheme.

For partnership firms, the treatment of partner remuneration and interest has been revised in recent years, and firms must now also deduct TDS under Section 194T on partner remuneration above the prescribed threshold. If you're a firm, confirm the current position before computing.

This is the provision most small business owners miss. Once you opt into 44AD, you are expected to continue for five consecutive years. If you opt out in any of those years — for instance by filing ITR-3 with regular business income — you are barred from using Section 44AD for the next five years.

Example: a business opts in for AY 2025-26 and opts out for AY 2026-27. It cannot use Section 44AD again until AY 2031-32.

Worse, once you opt out and your income exceeds the basic exemption limit, you must maintain books and get them audited. So the decision to leave the scheme has consequences well beyond the year you leave it.

Note the asymmetry: if you become ineligible for another reason — your turnover crosses the limit, say — the lock-in restriction doesn't bite in the same way. It's the voluntary exit that triggers the five-year bar.

Businesses under 44AD file ITR-4 (Sugam), which has a dedicated presumptive-income section: enter your turnover, the applicable rate, and the resulting income. For FY 2025-26, the ITR-4 due date (non-audit) is 31 August 2026. If you have capital gains, more than one house property, or foreign assets, ITR-4 is unavailable and you'd file ITR-3 instead — see our guide to which ITR form to file.

Also remember that the new tax regime is the default. Business filers who want the old regime must file Form 10-IEA, and once you switch back, the option to move again is restricted. See our guide to the new vs old tax regime.

Two questions settle it:

1. Is your actual profit margin consistently above the deemed rate? If yes, presumptive taxation likely saves you tax and effort. If your real margin is thinner than 6-8%, regular books may serve you better. 2. Will your turnover stay within the limits for the next five years? If you're growing fast or your revenue is volatile, the lock-in becomes a liability.

Turnover limits, rates, and partner-remuneration treatment have all been amended in recent years. Treat this as a current-position guide for FY 2025-26 and confirm the applicable figures with a professional before you commit — especially given the five-year lock-in.

Section 44AD is one of the best compliance bargains available to a small Indian business: declare 6% of digital turnover and 8% of cash turnover, skip the books and the audit, file a simple ITR-4, and pay advance tax once a year. But it is a five-year decision, not an annual one, and it's closed to LLPs and companies. Check your real margin against the deemed rate, look ahead five years at your turnover, and choose deliberately — because opting out is far more expensive than opting in.

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1. What is the turnover limit for Section 44AD? ₹2 crore in general, rising to ₹3 crore where cash receipts do not exceed 5% of total receipts (with cash payments similarly within 5% of total payments).

2. How is income calculated under Section 44AD? At 6% of turnover received through digital modes and 8% of turnover received in cash or other non-digital modes. These are minimum rates — you may declare more.

3. Can an LLP or a company use Section 44AD? No. The scheme is only for resident individuals, HUFs, and partnership firms. LLPs, companies, and non-residents are excluded — a common surprise for businesses that chose an LLP structure.

4. What is the five-year rule under Section 44AD? Once you opt in, you're expected to continue for five consecutive years. Opting out in any of those years bars you from the scheme for the next five years, and requires you to maintain books and get them audited if your income exceeds the basic exemption limit.

5. Which ITR form do I file under Section 44AD? ITR-4 (Sugam). For FY 2025-26, the non-audit due date is 31 August 2026. If you have capital gains, more than one house property, or foreign assets, you must use ITR-3 instead.

6. What is the difference between Section 44AD and 44ADA? 44AD is for businesses and traders, at 6%/8% of turnover with limits of ₹2 crore/₹3 crore. 44ADA is for specified professionals, at 50% of gross receipts with a limit of ₹50 lakh (₹75 lakh where cash receipts are within 5%).

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