If your business turnover is under ₹2 crores, Section 44AD offers a simple tax shortcut: skip maintaining detailed books of accounts, skip tax audits, and declare profits based on a fixed percentage of your turnover.
It's called presumptive taxation, and it's designed to reduce the compliance burden for small businesses. But here's the catch: it's not always the best choice. Sometimes it saves you money and paperwork; sometimes it costs you more in taxes.
This complete guide explains Section 44AD's 8% deemed profit rule, who's eligible, the real pros and cons, and—most importantly—how to calculate whether it's actually saving you money or costing you more.
What is Section 44AD Presumptive Taxation?
Section 44AD is a presumptive taxation scheme introduced to simplify tax compliance for small businesses. Under this scheme:
- Your taxable profit is presumed to be a fixed percentage of your turnover
- No need to maintain detailed books of accounts (no cash books, ledgers, vouchers)
- No tax audit required under Section 44AB (even if turnover > ₹1 crore)
- File a simpler ITR-4 (Sugam) instead of ITR-3
The 44AD Formula
OR
Deemed Profit = 6% of Turnover (Digital)
This deemed profit is your taxable income, regardless of actual expenses.
Eligibility Criteria
Who Can Use Section 44AD?
- Turnover limit: Total turnover/gross receipts should not exceed ₹2 crores in the financial year
- Business type: Any business (trading, manufacturing, retail) EXCEPT:
- Professional services (covered under Section 44ADA instead)
- Commission/brokerage business
- Businesses mentioned in Section 44AE (transport) or 44BB/44BBB
- Eligible taxpayers: Individual, HUF, Partnership Firm (NOT LLP or Company)
⚠️ Not Available For:
- Companies and LLPs
- Professionals (doctors, CAs, lawyers, consultants) → use Section 44ADA
- Businesses with turnover > ₹2 crores
- Income from agency, commission, or brokerage
How Section 44AD Works: Real Calculation
📊 Example 1: Retail Store (Mostly Cash Payments)
Digital Receipts: ₹10,00,000 (12.5%)
Cash receipts: ₹70,00,000 × 8% = ₹5,60,000
Digital receipts: ₹10,00,000 × 6% = ₹60,000
Total Deemed Profit: ₹6,20,000
Tax Payable (assuming 30% slab + cess): ₹1,93,220
Important: This ₹6,20,000 is your taxable income regardless of actual expenses. Even if your actual expenses were ₹75 lakhs (profit only ₹5 lakhs), you still pay tax on ₹6.2 lakhs.
Advantages of Section 44AD
✓ Benefits
- No books of accounts: Save time and accounting costs. No need to maintain cash book, ledger, journal, vouchers.
- No tax audit: Even if turnover is ₹1.5 crores (above ₹1 crore audit threshold), no Section 44AB audit required.
- Simple ITR filing: File ITR-4 (Sugam) instead of complex ITR-3 with P&L and balance sheet.
- Lower compliance cost: No need to hire CA for monthly bookkeeping or audit (typically saves ₹30,000-₹50,000/year).
- Advance tax relief: Pay advance tax in one installment (March 15) instead of quarterly.
- Good for high-margin businesses: If your actual profit is > 8%, you're only taxed on 8%.
Disadvantages & Limitations
❌ Limitations
- Can't claim actual expenses: Even if your expenses are 95% of turnover (profit only 5%), you pay tax on 8% deemed profit.
- Loss carry-forward not allowed: If your business actually made a loss, you can't carry it forward to offset future profits.
- Minimum profit floor: You're taxed on at least 8% profit even if actual profit is lower or negative.
- Depreciation not allowed: Can't claim depreciation on assets. 8% deemed profit is your final income.
- Exit difficulty: If you opt out, you can't re-enter 44AD for 5 years. You'll have mandatory audit for next 5 years.
- Not for low-margin businesses: If your actual profit margin is <6-8%, you'll pay more tax under 44AD.
When Does 44AD Make Sense?
| Your Situation | Is 44AD Good? | Reason |
|---|---|---|
| High-margin business Actual profit > 10% |
✓ YES | You'll be taxed on only 8% instead of your actual 10%+ profit. Tax saving + no audit. |
| Profit margin 8-10% Close to deemed profit |
~ MAYBE | Marginal benefit. Consider compliance cost savings vs. potential higher tax. |
| Low-margin business Actual profit < 6% |
✗ NO | You'll pay more tax. Better to maintain books and show actual lower profit. |
| Business with losses | ✗ NO | 44AD presumes profit, so you can't show loss. Plus can't carry forward loss. |
| High depreciation Purchased expensive assets |
✗ NO | Can't claim depreciation under 44AD. You'll lose significant tax deductions. |
| New business, uncertain margins | ✗ NO | First 2-3 years often have high expenses/losses. Maintain books for better control. |
44AD vs Normal Taxation: Which Saves More?
📊 Scenario: Retail Business with ₹50L Turnover
Option A: Section 44AD
Deemed Profit (8%): ₹4,00,000
Tax (30% slab + cess): ₹1,24,800
No audit cost, no bookkeeping cost
Option B: Regular Taxation (Actual Profit 5%)
Actual Expenses: ₹47,50,000
Actual Profit: ₹2,50,000
Tax (30% slab + cess): ₹78,000
Audit cost: ₹15,000
Bookkeeping cost: ₹30,000/year
Total Cost: ₹1,23,000
Result: Regular taxation actually costs slightly less (₹1,23,000 vs ₹1,24,800) despite audit costs, because actual profit is only 5%.
Conclusion: For low-margin businesses, maintain actual books even if it means audit costs.
Important Rules & Restrictions
1. Cash vs Digital Receipts
For receipts via digital modes (bank transfer, UPI, credit card, cheque), deemed profit is 6% instead of 8%. This encourages digital transactions.
2. Opting Out Consequences
⚠️ Critical Restriction
If you declare profit lower than 8% (i.e., opt out of 44AD), you:
- Cannot use 44AD for the next 5 years
- Must maintain books of accounts for 5 years
- Mandatory tax audit for 5 years (if turnover > ₹1 crore)
Think carefully before opting out. It's a 5-year commitment to higher compliance.
3. First-Time 44AD Adoption
You can adopt 44AD in any year as long as you meet eligibility. No pre-intimation to department required—just file ITR-4 declaring 44AD income.
4. Partnership Firms
Partnership firms (not LLP) can use 44AD. Partner's salary and interest are NOT deductible (already included in deemed 8% profit).
Section 44ADA: For Professionals
If you're a professional (doctor, CA, lawyer, architect, consultant, freelancer), use Section 44ADA instead of 44AD:
- Deemed profit: 50% of gross receipts
- Turnover limit: ₹50 lakhs (not ₹2 crores)
- Otherwise similar benefits (no books, no audit)
Decision Framework
Should You Choose Section 44AD?
Your actual profit margin is consistently > 8-10% AND you want to save compliance costs.
You're a small trader/retailer with straightforward operations and high margins.
Your profit margin is < 6% or you're in a low-margin industry (wholesale, B2B distribution).
You've recently purchased expensive assets and want to claim depreciation.
Your business is new/growing and you anticipate losses or high initial expenses.
You need accurate financial statements for bank loans or investor presentations.
Frequently Asked Questions
Q: Can I switch to 44AD mid-year?
A: No. The decision is made at ITR filing time (end of financial year). You can adopt 44AD for the entire financial year when filing your return.
Q: What if my turnover exceeds ₹2 crores in the middle of the year?
A: You automatically exit 44AD for that year. File ITR-3, maintain books, get audit done. Can re-enter 44AD next year if turnover drops below ₹2 crores (no 5-year bar because you didn't voluntarily opt out).
Q: Can I claim expenses like rent, salary under 44AD?
A: No. The 8% deemed profit already accounts for all expenses. You cannot claim any additional expenses, deductions, or depreciation.
Q: Is GST applicable under 44AD?
A: Yes. Section 44AD is for income tax. GST applies separately based on your turnover (₹20L/₹40L threshold).
Confused About Presumptive Taxation?
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