Presumptive Taxation (Section 44AD)
Section 44AD of the Income Tax Act, 1961 allows eligible small businesses — with gross receipts not exceeding ₹3 crore (or ₹2 crore if cash receipts exceed 5% of total) — to declare income at a presumptive rate of 8% of turnover (6% for digital receipts), exempting them from maintaining detailed books of accounts and from tax audit requirements.
Section 44AD was introduced to reduce compliance burden for small businesses, allowing them to declare a flat percentage of turnover as profit without the need to maintain elaborate books of accounts or get accounts audited. The scheme is available to individuals, HUFs, and partnership firms (but not LLPs or companies) engaged in any eligible business — which explicitly excludes professionals, commission agents, and businesses engaged in the plying or hiring of goods carriages.
The presumptive rate under Section 44AD is 8% of gross receipts or turnover. However, the Finance Act 2016 introduced a concessional rate of 6% for receipts through banking channels, digital payments, or account payee cheques — a measure designed to encourage cashless business transactions. If a taxpayer's total income exceeds the basic exemption limit and they declare income under 44AD, they are not required to maintain books or get a tax audit done, significantly reducing compliance costs.
For equity and F&O traders, Section 44AD has limited relevance. The section explicitly excludes speculative transactions from its ambit — intraday equity traders cannot opt for 44AD. Additionally, the CBDT clarified through circular guidance that while F&O trading is not speculative, it is a derivative trading activity, and whether it qualifies as an eligible business under 44AD has been a contested area. Most tax practitioners advise F&O traders with significant volumes to maintain proper books rather than risk a presumptive tax dispute.
A five-year lock-in applies under Section 44AD: if a taxpayer opts for the presumptive scheme and later claims lower income (through actual books) within five years, they are barred from opting for 44AD for the next five years. This provision prevents taxpayers from switching in and out of the scheme opportunistically based on annual profitability.
Budget 2023 expanded the turnover limit under 44AD from ₹2 crore to ₹3 crore for businesses where cash receipts do not exceed 5%. This doubled the universe of eligible businesses. Budget 2024 further aligned the advance tax provisions — taxpayers under 44AD now pay 100% of advance tax in a single instalment by March 15, simplifying the quarterly advance tax schedule.