Presumptive Taxation: When to Use & When to Avoid?

To give relief to small taxpayers from the tedious job of maintenance of books of account and from getting the accounts audited, the Income-tax Act has framed the presumptive taxation scheme.

For small taxpayers the Income-tax Act has framed three presumptive taxation schemes as given

below:

1) The presumptive taxation scheme of section 44AD.

2) The presumptive taxation scheme of section 44ADA.

3) The presumptive taxation scheme of section 44AE

WHEN TO USE PRESUMPTIVE TAXATION

1.When Turnover is not so high

If turnover is below the limit:

• Rs. 2/3 crore (for 44AD—business)

• Rs. 75 lakh (for 44ADA—professionals – if cash receipts ≤5%)

• 10 or fewer vehicles (44AE)

then presumptive taxation helps in reducing compliance burden.

2. When You Have High Profit Margins

If actual profit is higher than the presumptive percentage (e.g., 8% or 6% under 44AD, 50% under 44ADA), you can save tax by declaring presumptive income.

3. When You Want to Avoid Audit

If you wish to avoid mandatory tax audit, maintaining detailed books, maintaining stock register, vouchers, etc., presumptive scheme is advantageous.

If an assessee is opting for the presumptive tax scheme of Section 44AD, the tax audit under

section 44AB shall not be required in the case of such assessees.

4. For Freelancers / Small Professionals

44ADA is ideal for consultants, designers, engineers, teachers, architects, accountants, lawyers

where keeping detailed books is not convenient.

5. For Small Professionals Who Do Not Want to Maintain Books

Professionals with gross receipts up to Rs. 75 lakh can use 44ADA. Ideal for:

• CA/CS/CWA professionals

• Architects

• Lawyers

• Doctors with small clinics

• Software engineers

• Interior designers

• Digital marketers

WHEN TO AVOID PRESUMPTIVE TAXATION

Assessee should not choose presumptive scheme in the following situations:

1. When Actual Profit is Lower Than Presumptive Rate

If your actual profit margin is:

• less than 6% / 8% (44AD), or

• less than 50% (44ADA)

then presumptive scheme forces higher tax. However, if you declare lower profit, tax audit becomes mandatory.

The income computed as per the prescribed rate will be the final taxable income of the business covered under the presumptive taxation scheme and no further expenses will be allowed or disallowed.

2. When You Need Bank Loans

Presumptive taxpayers show fixed, small profit. Banks may:

• reject loan

• reduce loan amount

• demand audited books

So if you plan to apply for:

• CC limits

• Housing loans

• Business loans

then presumptive taxation is not advisable.

3. When Turnover is Very High

A person whose total turnover or gross receipts for the year exceed Rs. 2,00,00,000 cannot

adopt the presumptive taxation scheme of section 44AD.

However, if the amount of cash received during the previous year does not exceed 5% of the total turnover or gross receipt of such year then the threshold limit for total turnover or gross receipt shall be taken as Rs. 3,00,00,000 instead of Rs. 2,00,00,000.

4. When You Have Significant Deductions

Presumptive scheme cannot be adopted by a person who has made any claim towards deductions under section 10A/10AA/10B/10BA or under sections 80HH to 80RRB in the relevant year.

So, if asseessee is eligible to claim deduction under section 10A/10AA/10B/10BA or under sections 80HH to 80RRB, he should avoid presumptive taxation scheme.

5. For Companies / LLPs

Presumptive schemes do not apply to Companies, LLPs. Only individuals, HUFs, and partnership firms (other than LLPs) can use 44AD/44ADA.

6. Once You Opt-out of 44AD – 5 Years Lock-out

If a person opts for presumptive taxation scheme then he is also require to follow the same scheme for next 5 years. If he failed to do so, then presumptive taxation scheme will not be available for him for next 5 years. [For example, an assessee claims to be taxed on presumptive basis under Section 44AD for 2023-24. However, for AY 2024-25, if he did not opt for presumptive taxation Scheme. In this case, he will not be eligible to claim benefit of presumptive taxation scheme for next five AYs, i.e. from AY 2025-26 to 2029-30.]

Further, he is required to keep and maintain books of account and he is also liable for tax audit as per section 44AB from the AY in which he opts out from the presumptive taxation scheme. [If his total income exceeds maximum amount not chargeable to tax]