Presumptive taxation is the simplest part of Indian income tax law and one of the most frequently mishandled. The arithmetic is easy. The conditions attached to it are not, and the consequence of opting in and later opting out is a five-year penalty that very few taxpayers are told about at the time they make the choice.
What presumptive taxation actually does
The presumptive scheme replaces the computation of income with a deemed figure. Instead of recording every receipt and every expense and arriving at a profit, the taxpayer declares a fixed percentage of turnover as income and pays tax on that.
Two obligations fall away as a result. The requirement to maintain books of account under section 44AA does not apply to income covered by the scheme, and the tax audit requirement under section 44AB does not apply so long as the taxpayer declares income at or above the presumptive rate and stays within the limits.
That is the bargain: give up the ability to claim actual expenses, and gain freedom from books and audit.
That is the simplest bargain available in income tax compliance in India, and it comes with conditions attached.
Section 44AD: small businesses
Section 44AD applies to a resident individual, Hindu undivided family or partnership firm carrying on an eligible business. A limited liability partnership is expressly outside the scheme, as is a company. Commission and brokerage businesses, agency businesses and professions covered by section 44ADA are excluded.
The rates. Income is deemed at 8 per cent of turnover or gross receipts. Where the receipt is by account payee cheque, bank draft, electronic clearing or a prescribed electronic mode, the rate is 6 per cent. In practice most businesses have a mixed receipt profile and apply the two rates to the respective portions.
The limit. The standard turnover limit is ₹2 crore. It is raised to ₹3 crore where cash receipts do not exceed 5 per cent of total turnover or gross receipts.
A taxpayer may declare income higher than the presumptive rate. What is not permitted is declaring lower while claiming the benefits of the section.
Section 44ADA: professionals
Section 44ADA applies to a resident carrying on a profession referred to in section 44AA(1) — legal, medical, engineering, architectural, accountancy, technical consultancy, interior decoration and other notified professions.
The rate. Income is deemed at 50 per cent of gross receipts.
The limit. The standard limit is ₹50 lakh, raised to ₹75 lakh where cash receipts do not exceed 5 per cent of gross receipts.
Fifty per cent is a blunt figure. For a professional with a genuinely low cost base — a consultant working from home with no staff — it may overstate expenses and therefore understate tax relative to actual profit, which is why the scheme is attractive. For a professional running an office with salaried staff, actual profit may well be below 50 per cent, and the scheme costs money rather than saving it. The choice deserves a calculation rather than a habit.
The choice between the scheme and regular computation is one of several that differ by taxpayer type; our note on return filing across taxpayer categories sets out the others.
Section 44AE: goods carriages
Section 44AE works differently. There is no turnover limit; the restriction is on the number of vehicles. The scheme is available to a person who owns not more than ten goods carriages at any time during the year.
The rates are per vehicle per month, or part of a month:
| Vehicle | Deemed income |
| Heavy goods vehicle (gross vehicle weight exceeding 12 tonnes) | ₹1,000 per tonne of gross vehicle weight per month |
| Any other goods carriage | ₹7,500 per month per vehicle |
The month count runs from the date the vehicle is owned, and part of a month counts as a month. As with the other sections, a higher figure may be declared.
The ten-vehicle test is a during the year test, not a year-end test. An operator who briefly held eleven vehicles during the year is outside the scheme for that year, even if the fleet was back to nine by 31 March.
The five per cent cash condition
The enhanced limits — ₹3 crore under section 44AD and ₹75 lakh under section 44ADA — are conditional, and the condition is easy to breach without noticing.
Cash receipts must not exceed 5 per cent of total turnover or gross receipts. For this purpose, a receipt by way of a cheque or bank draft that is not account payee is treated as a cash receipt. That is a trap in itself: a bearer cheque counts against the taxpayer.
The consequence of breaching the condition is not a proportionate adjustment. The enhanced limit is simply unavailable, and the standard limit of ₹2 crore or ₹50 lakh applies instead. A business with turnover of ₹2.6 crore and cash receipts of 6 per cent is therefore outside the scheme altogether — and, being outside it and above the standard threshold, is looking at the tax audit process it had assumed it did not need.
The practical control is simple: track the cash-receipt percentage monthly rather than discovering it at the year end, when nothing can be done about it.
The five-year lock-in
This is the provision that causes the most difficulty, and it applies to section 44AD.
Where a taxpayer declares income under section 44AD for a year and then, in any of the five succeeding assessment years, declares income not in accordance with the section, the taxpayer is barred from claiming the benefit of section 44AD for five assessment years following the year in which the income was declared outside the scheme.
The practical effect is severe. During that exclusion period, if total income exceeds the basic exemption limit, the taxpayer must maintain books of account and have them audited — the two obligations the scheme existed to avoid.
The trap is that opting out is often unintentional. A year with a genuine loss, or a year in which actual profit is below 8 per cent and the taxpayer declares the lower actual figure, triggers the consequence just as deliberately abandoning the scheme would.
The decision to enter section 44AD should therefore be taken with a view of the next six years, not the current one. A business with volatile margins, or one that expects a loss year, may be better served by regular computation from the outset.
A business entering the scheme should therefore keep its accounting and bookkeeping in order regardless, because the exclusion period brings both obligations straight back.
What you give up
Presumptive taxation is not free of cost, and the costs are worth listing.
No further deductions. Depreciation, salaries, rent, interest and every other expense are deemed already allowed. Written down value of assets continues to be computed as though depreciation had been allowed, so the base for a later year or a sale is reduced.
Losses cannot be declared. Declaring a loss is, by definition, declaring income not in accordance with the section.
Advance tax still applies. For section 44AD and 44ADA, the whole of the advance tax is payable in a single instalment by 15 March of the year. Missing that instalment attracts interest, and it is a commonly missed date precisely because the scheme feels like a simplification.
Records are still needed in practice. The exemption from section 44AA relieves the taxpayer of the statutory obligation to maintain prescribed books. It does not mean a taxpayer can be indifferent to evidence. Turnover has to be demonstrable, and a mismatch between declared turnover and GST returns, bank credits or the Annual Information Statement will be asked about.
Scrutiny of turnover, not of profit. Because the profit figure is deemed, an enquiry into a presumptive return concentrates almost entirely on whether turnover has been correctly stated. Records supporting turnover therefore matter more, not less.
The scheme simplifies the return. It does not simplify the rest of a business’s business taxation obligations.
Presumptive taxation under the 2025 Act
The Income-tax Act, 2025 governs income arising on and after 1 April 2026. The presumptive schemes are carried forward in substance — the concept, the eligible categories and the deeming approach all survive — but they sit under renumbered provisions.
Two cautions apply here, and both are the same caution we would give on any provision of the new Act. First, the section numbers change, and the concordance tables circulating online do not all agree with each other. The correspondence should be confirmed against the departmental utility comparing the 1961 and 2025 Acts rather than taken from a summary. Second, the substance should be read rather than assumed: where a scheme has been recast into a table or a schedule, thresholds and conditions may be expressed differently even where the policy is unchanged.
For income of the financial year 2025-26, the 1961 Act and the sections discussed above continue to apply.
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