Section 44AD of Income Tax Act - Features, Eligibility, Application

Introduction

Running a small business is demanding enough without the added burden of complex accounting. Maintaining ledgers, tracking every petty cash expense, and getting books audited by a Chartered Accountant can be overwhelming and expensive for a shopkeeper, trader, or small service provider.

To ease this burden, the Income Tax Department offers a lifeline: Section 44AD. This is a "Presumptive Taxation Scheme" that allows you to declare a percentage of your turnover as profit and pay tax on it, without the need for detailed bookkeeping or audits.

In 2025, the scheme will become even more attractive with an enhanced turnover limit of ₹3 Crore for digital-first businesses. This section essentially asks you to pay a "fair share" of tax based on an assumed profit margin, freeing you from the scrutiny of expense verification. In this guide, we will break down the eligibility, the dual tax rates (6% vs 8%), and the strict "5-Year Lock-in" rule you must be aware of.

Table of Contents

1. What is Section 44AD?
2. Who is Eligible? (Business Types)
3. Who is NOT Eligible? (Negative List)
4. The "Presumptive" Profit Rate: 6% vs 8%
5. Turnover Limits for 2025 (₹2 Cr vs ₹3 Cr)
6. Benefits: Why Choose 44AD?
7. The 5-Year Lock-in Period Rule
8. Can You Declare Higher or Lower Profit?
9. Which ITR Form to File?
10. FAQs

What is Section 44AD?

Section 44AD is a scheme designed to give relief to small taxpayers from the tedious job of maintaining books of account and getting them audited.

Under this section, you are not required to calculate your actual profit by deducting expenses from revenue. Instead, you simply declare a fixed percentage of your turnover as "Deemed Profit" and pay tax on that amount. The government presumes you have earned this much.

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Who is Eligible? (Business Types)

The scheme is open to "Eligible Assessees" engaged in an "Eligible Business."

Eligible Assessee:

1. Resident Individuals (Sole Proprietors).
2. Hindu Undivided Families (HUFs).
3. Partnership Firms (excluding LLPs).

Eligible Business:

Any business (Manufacturing, Trading, Wholesale, Retail) except those specifically excluded below.

Who is NOT Eligible? (Negative List)

You cannot opt for Section 44AD if you fall into these categories:

1. Professionals: Doctors, Lawyers, Architects, etc. (They have a separate section 44ADA).
2. Agency Business: Insurance agents, Commission agents.
3. Brokerage Income: Stockbrokers or Real Estate brokers.
4. Goods Transport Agency (GTA): Plying, hiring, or leasing goods carriages (They have Section 44AE).
5. Limited Liability Partnerships (LLPs) and Companies.

The "Presumptive" Profit Rate: 6% vs 8%

To encourage the digital economy, the government offers a tax discount for non-cash transactions. The deemed profit rates are:

1. 6% Rate: Applicable on turnover received via Digital Modes (Cheque, UPI, NEFT, RTGS) before the due date of filing the return.
2. 8% Rate: Applicable on turnover received via Cash.

Example:

• Total Turnover: ₹80 Lakhs.
• Received via UPI: ₹60 Lakhs.
• Received via Cash: ₹20 Lakhs.
• Deemed Profit: (6% of 60L) + (8% of 20L) = ₹3.6L + ₹1.6L = ₹5.2 Lakhs.

You pay tax on ₹5.2 Lakhs.

Turnover Limits for 2025 (₹2 Cr vs ₹3 Cr)

The Finance Act 2023 enhanced the limits to support micro-enterprises.

1. Standard Limit: ₹2 Crore

If your cash receipts exceed 5% of the total turnover, your limit to opt for 44AD is ₹2 Crore. If you cross this, you must get a regular tax audit.

2. Enhanced Limit: ₹3 Crore

If your Cash Receipts are less than 5% of total turnover (i.e., 95% digital), you can use Section 44AD up to a turnover of ₹3 Crore.

Scenario: A trader with ₹2.5 Crore turnover (all digital) was earlier ineligible. Now, he can use 44AD and declare 6% profit.

Benefits: Why choose 44AD?

1. No Books: You are exempt from maintaining books of accounts under Section 44AA (Sales Register, Purchase Register, etc.).
2. No Audit: You save the CA audit fees as a Section 44AB audit is not required.
3. Easy Filing: You file a much simpler form (ITR-4).
4. Advance Tax: You pay the entire Advance Tax in one installment (by March 15th) instead of four.

The 5-Year Lock-in period rule

This is a trap many taxpayers fall into. Section 44AD comes with a continuity clause.

The Rule: If you opt for Section 44AD in any year (say, 2025), you must continue to opt for it for the next 5 consecutive years.

Consequence of Opting Out:

If you decide to opt out (i.e., declare a profit lower than 8%/6% and get audited) in any of the next 5 years, you will be barred from re-entering the scheme for the next 5 years.

• Example: If you opt out in 2027, you cannot use 44AD again until 2033.

Can you declare higher or lower profit?

• Higher: Yes. If your actual profit is 15%, you can (and should) declare 15%. The 6%/8% is the minimum floor.

• Lower: Yes, but with conditions. If you want to declare a profit lower than 8%/6% (say, you made a loss), you must:

  1. Maintain Books of Accounts.
  2. Get your accounts audited by a CA.
  3. File ITR-3 (not ITR-4).

Which ITR Form to file?

If you opt for Section 44AD, you must file ITR-4 (Sugam).

This form is pre-structured for presumptive income. It asks for:

• Total Turnover (Cash vs Digital).
• Deemed Profit.
• Financial Particulars (Creditors, Debtors, Cash Balance, Stock).