Presumptive Taxation under the Income-tax Act 1961 – A Complete FAQ-Based Guide

Presumptive taxation is a simplified method of computing taxable income for small businesses, transport operators, specified professionals and certain non-residents. Instead of maintaining detailed books and claiming actual expenses, eligible assessees can declare income at fixed percentages or fixed amounts, as prescribed in the Income-tax Act 1961.

This FAQ-style guide explains the core presumptive provisions contained in Section 44AD, Section 44ADA, Section 44AE, Section 44B, Section 44BB, Section 44BBA and Section 44BBB, with a special focus on the domestic small business and professional schemes (44AD and 44ADA) and transport scheme (44AE).

1. Concept and Scope of Presumptive Taxation

1.1 What is meant by “presumptive taxation scheme”?

Under Section 44AA, an assessee carrying on business or profession must maintain prescribed books of account when certain thresholds are crossed. To reduce this compliance burden for small assessees, the Act introduces presumptive schemes under:

  • Section 44AD
  • Section 44ADA
  • Section 44AE
  • Section 44B
  • Section 44BB
  • Section 44BBA
  • Section 44BBB

By choosing any of these schemes (where eligible), the assessee offers income at prescribed rates or amounts and is relieved from maintaining regular books for that presumptive segment. In many cases, tax audit and detailed allowance/disallowance provisions also become inapplicable for that business/profession.

Broadly, these sections cover:

  • Section 44AD: Small businesses of eligible resident individuals, resident HUFs and resident partnership firms (other than LLPs) up to specified turnover.
  • Section 44ADA: Presumptive scheme for certain resident professionals covered by Section 44AA(1).
  • Section 44AE: Business of plying, hiring or leasing goods carriages, subject to vehicle ownership limits.
  • Section 44B: Non-resident shipping business income.
  • Section 44BB: Non-resident income from services/facilities in connection with exploration of mineral oils.
  • Section 44BBA: Income of non-resident airlines.
  • Section 44BBB: Foreign companies engaged in civil construction etc. in certain notified projects.

2. Presumptive Scheme under Section 44AD – Small Businesses

2.1 Who can use Section 44AD?

The presumptive scheme in Section 44AD is open only to:

  1. Resident individuals
  2. Resident Hindu Undivided Families (HUFs)
  3. Resident partnership firms (excluding Limited Liability Partnership Firms)

Non-residents, LLPs and other persons (like companies, AOPs, BOIs, etc.) are outside the ambit of this section.

In addition, an assessee cannot opt for Section 44AD for a year in which he has claimed any deduction under:

  • Section 10A
  • Section 10AA
  • Section 10B
  • Section 10BA
  • Any of Sections 80HH to 80RRB

2.2 Which businesses are barred from Section 44AD?

Section 44AD is intended for small businesses generally, but excludes:

  • Business of plying, hiring or leasing goods carriages covered by Section 44AE
  • Any agency business
  • Any business deriving income mainly as commission or brokerage
  • Any business with total turnover or gross receipts exceeding:
    • Rs. 2,00,00,000; or
    • Rs. 3,00,00,000 where the cash receipts condition is satisfied (see below)

Enhanced turnover limit where cash receipts are low (from AY 2024-25)
If cash receipts during the previous year do not exceed 5% of total turnover/gross receipts, the permissible turnover limit to avail Section 44AD increases from Rs. 2,00,00,000 to Rs. 3,00,00,000.
For this test, any amount received via cheque or demand draft which is not account payee is treated as “cash” receipt.

Further, any assessee engaged in a profession referred to in Section 44AA(1) cannot adopt Section 44AD for that professional income. Such professionals have a separate scheme under Section 44ADA.

2.3 Can an insurance agent opt for Section 44AD?

No. Section 44AD is not available to persons earning income by way of commission or brokerage. Since an insurance agent’s earnings are in the nature of commission, the scheme under Section 44AD is not applicable to them.

2.4 Can a specified professional under Section 44AA(1) choose Section 44AD?

No. A person engaged in any profession listed in Section 44AA(1) is specifically excluded from Section 44AD. Such an assessee may instead use Section 44ADA, under which:

  • A resident professional may declare 50% of gross professional receipts as presumptive income.
  • The scheme is available only if gross receipts from the profession do not exceed Rs. 50,00,000 in a financial year (subject to enhanced limit discussed below).

Higher threshold for digital-mode professionals (from AY 2024-25)
If total cash receipts of the specified profession do not exceed 5% of gross receipts in the previous year, the limit for Section 44ADA eligibility increases from Rs. 50,00,000 to Rs. 75,00,000.
Non-account payee cheques/drafts are treated as cash for this purpose.

2.5 Turnover threshold for Section 44AD

The presumptive scheme in Section 44AD can be used only if turnover/gross receipts of the eligible business during the year do not exceed the monetary limit prescribed under Section 44AB. Practically, this means:

  • Generally up to Rs.