Presumptive taxation scheme — Section 44AD and 44ADA explained
Section 44AD lets eligible small businesses (turnover up to Rs 2 crore, or higher if receipts are mostly digital) declare 8% of turnover (6% for digital receipts) as taxable income. Section 44ADA lets specified professionals (gross receipts up to Rs 50 lakh, or higher for digital receipts) declare 50% of receipts as taxable income. Both schemes remove the need for detailed books of account and a tax audit, in exchange for a fixed, deemed profit margin.
Section 44AD — for small businesses
Available to resident individuals, HUFs, and partnership firms (not LLPs) carrying on an eligible business, with total turnover up to Rs 2 crore (extended to Rs 3 crore if cash receipts don't exceed 5% of total receipts). Taxable income is deemed to be 8% of turnover (6% for turnover received through banking channels or digital modes), regardless of actual profit margin.
Section 44ADA — for specified professionals
Available to resident individuals in specified professions — legal, medical, engineering, architecture, accountancy, technical consultancy, interior decoration, and certain other notified professions — with gross receipts up to Rs 50 lakh (extended to Rs 75 lakh if at least 95% of receipts are through banking channels). Taxable income is deemed to be 50% of gross receipts.
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Talk to a CA →What you give up: actual-expense deductions
Under both schemes, no separate deduction is allowed for actual business expenses — the deemed profit percentage is treated as final taxable income before further deductions under Chapter VI-A (like 80C, 80D). If your genuine expense ratio is higher than the deemed percentage, you may pay more tax under presumptive taxation than you would under the regular scheme with actual books.
Declaring income above the presumptive rate
You're allowed to voluntarily declare income higher than the presumptive percentage if your actual profit is higher — what you cannot do (without losing scheme eligibility for a period) is declare income below the presumptive rate while still claiming the scheme's audit exemption, except in narrow, specified circumstances.
The lock-in consequence of opting out
If a taxpayer who has used Section 44AD opts out of the presumptive scheme in a later year (declaring income below the presumptive rate, or under the regular scheme), they are generally barred from re-entering Section 44AD for the next five assessment years, and may also be required to maintain books of account and get them audited for that period — a meaningful long-term consequence of switching in and out.
Can I claim actual business expenses while using the presumptive taxation scheme?
No. Under both Section 44AD and Section 44ADA, the deemed profit percentage (8%/6% of turnover, or 50% of gross receipts respectively) is treated as your final business income for tax purposes — you cannot separately deduct actual expenses on top of that. If your real expenses are consistently higher than the deemed percentage, the regular scheme with proper books of account may result in lower tax, despite the added compliance of maintaining books and potentially an audit.
This article is for general information only. For your specific situation, consult a practicing CA.
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