Presumptive Taxation for Small Businesses
Section 44AD lets eligible small businesses declare income at a flat 8% of turnover (6% for digital receipts) and skip detailed books and tax audit — the compliance shortcut that dominates small-business tax planning and exam problems alike.
The provision, in plain terms
An eligible assessee (resident individual, HUF or firm other than LLP, not claiming specified deductions) carrying on an eligible business (not profession, agency, commission or brokerage; not plying goods carriages under 44AE) with turnover up to ₹2 crore (₹3 crore where cash receipts ≤ 5%) may declare 8% of turnover (6% for amounts received through banking/digital channels) as business income. All deductions under sections 30–38 are deemed allowed. Opting out after opting in bars re-entry for five assessment years and triggers books-and-audit obligations if income exceeds the basic exemption.
Points worth memorising
- Rate: 8% of turnover; 6% for receipts through account-payee banking channels/digital modes.
- Turnover ceiling: ₹2 crore, extended to ₹3 crore where cash receipts are ≤ 5% of total receipts.
- Eligible: resident individuals, HUFs, partnership firms (not LLPs); ineligible: professionals (see 44ADA), commission/brokerage/agency businesses.
- Five-year lock: declaring lower-than-presumptive income after opting in blocks 44AD for five years and mandates books plus audit (if above exemption).
- Advance tax: single instalment by 15 March instead of quarterly.
How the exam tests it
PGBP problems in CA Intermediate Taxation regularly turn on 44AD eligibility, the 6%/8% split and the five-year opt-out rule; Final Direct Tax layers it with audit-threshold interplay under 44AB.
Tested at: intermediate · final
Related sections
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Talk to usCan a professional use section 44AD?
No — professionals use section 44ADA, which allows declaring 50% of gross receipts (up to ₹50 lakh, extended to ₹75 lakh with ≤5% cash receipts) as income.
What happens if I declare less than 8% profit?
You must maintain books of account and get them audited under section 44AB (if income exceeds the basic exemption), and having opted out of 44AD, you cannot return to it for five assessment years.