44AD of Income Tax Act – Presumptive Tax Scheme for Small Businesses

Let’s discuss Raj, a small business owner in Delhi who spent countless hours managing his accounts and calculating expenses. With an annual turnover of ₹80 lakhs from his retail store, he struggled to keep track of every receipt (cash receipts included) and wondered if there was an easier way to handle his taxes. 

Like many small business owners in India, tax compliance became a major challenge.

The good news is that the government has simplified tax filing through the presumptive taxation scheme under Section 44AD of the Income Tax Act. This guide will walk you through everything you need to know—from eligibility and income limits to filing your tax returns. Whether you run a retail store or operate as a freelancer, you'll learn how this scheme lets you declare a fixed turnover percentage as taxable net income, simplifying tax compliance.

What is Section 44AD of the Income Tax Act?

Section 44AD makes it really simple for small businesses to calculate their taxable income. Instead of tracking and deducting every expense from gross revenue, this scheme lets you declare a fixed percentage of your turnover as income—8% for cash transactions and 6% for digital payments.

Let's say your business has an annual income of ₹50 lakhs, mostly through digital modes. Rather than maintaining detailed expense and other financial records, you can declare 6% of this amount (₹3 lakhs) as your taxable income. This presumptive income is then taxed according to regular income tax slabs.

The scheme removes the burden of extensive bookkeeping and helps small businesses focus more on growing their business than managing complex accounts.

Who is eligible for 44AD of the Income Tax Act? 

Not every business can opt for Section 44AD. The scheme is specifically designed for small businesses operating in India. 

Here's who can use it:

However, professionals like doctors, lawyers, and architects must look at Section 44ADA instead of 44AD for their tax filing. Also, this scheme isn't for you if you've incorporated a private limited company.

Remember, the key word here is "resident of India ." Non-resident Indians (NRIs) running businesses in India can't opt for this scheme, even if they meet all other criteria.

📚Note: Being eligible by business type isn't enough—you'll also need to meet the turnover criteria, which we'll cover in the next section.

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Which businesses are not covered under 44AD of the Income Tax Act?

Let us clarify which businesses can't use Section 44AD, even if they meet the turnover criteria:

What are the limits under 44AD of the Income Tax Act? 

Think of turnover as all the money your business earns in a year or the previous year. The limits for using Section 44AD depend on how you receive your payments: 

Here's a simple example: If your business makes ₹2.5 crore annually and almost all payments come through bank transfers, UPI, or account payee cheques, you can use this scheme. But if you receive even ₹13 lakhs (more than 5%) in cash, you'll be limited to the ₹2 crore threshold.

📚Note: Payments received through bearer cheques or non-account payee bank account drafts are counted as cash payments. Only digital transfers and account payee cheques qualify as non-cash payments.

For instance, if you run a wholesale business making ₹2.8 crore annually with 98% payments through UPI and bank transfers, you can opt for Section 44AD. However, you won't be eligible if you run a retail store with the same turnover but receive 10% payments in cash.

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Taxable Income under 44AD of the Income Tax Act 

Let's understand how your taxable return of income is calculated under Section 44AD with some real-world examples:

Under this scheme, you don't need to calculate your profit by subtracting expenses. Instead, a fixed percentage of your total turnover is considered as your taxable income:

Here is how this works:

Say you run a grocery store with an annual turnover of ₹1 crore. If all your customers pay in cash, your taxable income would be ₹8 lakhs (8% of ₹1 crore). But if most customers pay through UPI or bank transfers, your taxable income would be only ₹6 lakhs (6% of ₹1 crore).

Here's another example: Your business has a turnover of ₹50 lakhs, with ₹30 lakhs through digital payments and ₹20 lakhs in cash. Your taxable income would be:

📚Note: You can't claim additional expenses after choosing these percentages. Even if your actual expenses are higher, they won't reduce your tax liability further. 

However, you can always declare more income if your profits exceed these percentages.

Remember, this taxable income will be subject to regular tax rates based on your tax slab.

What is the tax rate for 44AD? 

The tax under Section 44AD follows the same income tax slab rates that apply to all individuals. The only difference is in how your taxable income is calculated.

For example, if your business turnover is ₹50 lakhs through digital payments, your taxable income would be ₹3 lakhs (6% of turnover). This ₹3 lakhs is then taxed according to your income tax slab - whether you fall in the 5%, 20%, or 30% bracket depends on your total income, including income from other sources.

Remember, you can choose the old or new tax regime while paying taxes on this income.

Section 44AD of Income Tax Act with Example 

Here are two practical examples to understand Section 44AD. These examples will help you show the difference between opting and not opting for this scheme:

Example 1: Small Retail Store

Meet Priya, who runs a local grocery store with an annual turnover of ₹40 lakhs, mostly through UPI payments.

Under Section 44AD:

Without Section 44AD:

Let's see how this works:

Total turnover: ₹40 lakhs

Common expenses:

Total expenses: ₹35 lakhs

Taxable income: ₹5 lakhs (₹40 lakhs - ₹35 lakhs)

Example 2: Trading Business

Consider Rajesh, who runs a wholesale business with ₹1.5 crore turnover mostly in cash.

Under Section 44AD:

Taxable Income:

No detailed bookkeeping is needed.
Simple ITR filing via ITR 4

Without Section 44AD:

Total turnover: ₹1.5 crore

Typical business expenses:

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Do I Have to Pay Advance Tax Under Section 44AD of the Income Tax Act? 

If you opt for Section 44AD, you must pay advance tax, but the rules are simpler than regular advance tax payments. Let's understand this clearly:

Under normal tax rules, you must pay advance tax in four instalments yearly. But if you've opted for Section 44AD, you only need to make one payment - due date by March 15th of the financial year.

Here's a practical example: Suppose your business turnover for FY 2023-24 is ₹50 lakhs through digital modes. Your presumptive income would be ₹3 lakhs (6% of turnover). You need to calculate the tax on this amount and pay it as advance tax by March 15, 2024.

Warning: If you miss this March 15th deadline, you must pay interest under Section 234C. The interest is calculated at 1% per month on the unpaid tax amount.

💡Quick Tip: Estimate your annual turnover by early March and ensure you pay advance tax on time. This helps avoid any last-minute rush and potential interest charges.

Do I have to Maintain Books of Account under Section 44AD of the Income Tax Act? 

One of the biggest advantages of Section 44AD is that it frees you from detailed bookkeeping requirements. Let's understand what this means for your business:

If you declare income at 6-8% of your turnover under Section 44AD:

However, it's still good business practice to keep basic records like:

For example, If you run a retail store with ₹80 lakhs turnover and opt for Section 44AD, you don't need to track every small expense like electricity bills, staff salaries, or shop maintenance. Depending on your payment modes, you'll just declare 6-8% of your turnover as income.

📚Note: This exemption from maintaining books applies only if you declare at least 6-8% of turnover as income. If you declare a lower percentage, you must maintain complete books and get them audited.

Section 44AD of Income Tax Act: 5-Year Rule 

Once you opt for Section 44AD, you must stay with it for five consecutive years. Here's how it works:

Say you start using Section 44AD in FY 2022-23:

Here's a real example: Amit runs a trading business and opts for Section 44AD in FY 2022-23, declaring 6% of his ₹1 crore turnover as income. In FY 2023-24, he declares actual profits instead of presumptive income. As a result:

💡Pro Tip: Before opting for Section 44AD, consider whether you can commit to it for 5 years, especially if your business is growing rapidly or your profit margins differ significantly from the presumptive rates. 

Which ITR form to choose for Section 44AD of the Income Tax Act? 

If you're filing taxes under Section 44AD, you must use ITR-4 form for your income tax return.

Mistakes to Avoid When Opting for Section 44AD 

Watch out for these common mistakes under Section 44AD: 

Not checking if you qualify 

Before jumping in, make sure your business qualifies. For example, if you're a doctor or lawyer, you can't use Section 44AD (you need 44ADA instead). Also, check your turnover - it should be under ₹2 crore or ₹3 crore if 95% of your payments are digital.

Getting the math wrong on digital payments 

Many business owners forget digital payments are taxed at 6%, not 8%. Let's say you receive ₹50 lakhs through UPI - your taxable income would be ₹3 lakhs (6%), not ₹4 lakhs (8%). This simple mistake could cost you extra tax.

The five-year lock-in rule 

Think carefully before opting out. Raj, a small retailer, opted out after two years, thinking he could switch back when it was convenient. Now he's stuck maintaining detailed books and paying for audits for five years - something he wasn't prepared for.

Trying to claim extra deductions 

Once you choose Section 44AD, 6-8% is your final taxable income. Some business owners try to claim additional expenses on top of this, but that's not allowed and could get you in trouble with the tax department.

Remember: Section 44AD is meant to simplify your tax life. Following these guidelines can help you avoid unnecessary complications and keep things straightforward.

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Managing taxes and compliance as a small business owner receiving international payments can feel overwhelming. While Section 44AD simplifies your tax calculations by letting you declare just 6-8% of turnover as taxable income, handling international payments is often challenging.

Skydo helps make this easier by providing instant FIRC (Foreign Inward Remittance Certificate) for your international payments, which you need for tax compliance. With local receiving accounts in multiple countries and GST-compliant invoicing, you can focus on growing your business while Skydo handles the payment compliance aspects. The lower transaction fees mean more of your hard-earned money reaches your account. 

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