Presumptive Taxation in India is a simplified tax scheme under Sections 44AD and 44ADA of the Income Tax Act, 1961, that allows eligible small businesses and professionals to declare income at a prescribed percentage of turnover/receipts without maintaining detailed books of accounts. How does presumptive taxation work, and who can opt for it? Let’s break it down.
Presumptive Taxation under Section 44AD: The Basics
Under section 44AD, eligible small businesses can opt to pay tax on a “presumed” profit, instead of calculating actual expenses.
- The turnover threshold for 44AD is now ₹ 3 crore if your cash receipts are limited, otherwise it’s ₹ 2 crore.
- Income is presumed at 8% of turnover for non-digital receipts, and 6% if most receipts come through digital modes (bank transfer, cheque, etc.).
- You don’t need to maintain detailed books of account or conduct an audit if you stay on this scheme.
- But once you opt in, you must continue for five consecutive years. If you exit early, you cannot re-enter the scheme for the next five years.
Presumptive Taxation under Section 44ADA: For Professionals
Section 44ADA extends the presumptive tax scheme to certain small professionals like doctors, lawyers, engineers, and consultants.
The limit for 44ADA is ₹ 50 lakh, but if over 95% of income is via banking or electronic mode, it goes up to ₹ 75 lakh. You must declare 50% of your gross receipts as presumed income. Like 44AD, no detailed books or audit are required under 44ADA, easing the compliance burden for solo professionals.
Why Opt for Presumptive Taxation? Benefits & Trade-Offs
Benefits:
- Less paperwork: No need for full accounting records or auditing.
- Predictable tax liability: Since income is a fixed percentage of turnover, you can plan better.
- Encourages digital payments: The lower rate for electronic receipts (6% vs 8%) nudges you to go cashless.
Trade-Offs:
- No additional expense deductions: When you declare income by the presumptive rate, you can’t separately deduct actual costs.
- Commitment risk: As mentioned, opting out before 5 years bars re-entry for another 5 years.
- Not for everyone: Certain professions or business types (like agency or brokerage) are excluded from 44AD.
How to Decide if Presumptive Taxation Is Right for You:
If you run a small business with turnover under the limits, and don’t want to maintain full books or do audits, then section 44AD presumptive taxation could save you hassle. On the other hand, if you’re a freelance professional or consultant, 44ADA might be ideal, as you can declare half your gross receipts as taxable income and enjoy simpler compliance.
However, it’s important to compare with the regular taxation regime: if your real business expenses are much lower than what the presumptive rate assumes, regular taxation (with full bookkeeping) might sometimes be more favorable.
Conclusion:
Presumptive Taxation offers a practical, low‑compliance way for small entrepreneurs and professionals to meet their tax obligations. It simplifies tax filing, cuts audit burdens, and encourages formalization. While it may not suit everyone, for many small taxpayers it offers a powerful way to balance compliance and cost. Ready to switch to presumptive taxation? Explore more financial insights now!
– Ketaki Dandekar (Team Arthology)
Read more about Presumptive Taxation here – https://cleartax.in/professional-business-income