Presumptive taxation of small businesses

Meaning

Small businesses often keep few records. To spare them the cost of accounts and audit, the Act lets them declare business income at a fixed percentage of turnover instead of computing actual profit. The provision the question names, section 44AD of the Income-tax Act, 1961, is section 58(2) (Table: Sl. No. 1) of the Income-tax Act, 2025.

Who can use it (section 58(11)(a))

An eligible assessee is a resident individual, Hindu undivided family or firm (other than a limited liability partnership) that:

1. has not claimed any deduction under Chapter VIII-C for the year (the further bar on a deduction under section 144 was removed by the Finance Act, 2026, section 40);
2. does not carry on a specified profession (law, medicine, accountancy and the like, section 62(4));
3. does not earn commission or brokerage; and
4. does not carry on an agency business. The scheme applies to any business except plying, hiring or leasing goods carriages, which has its own scheme (Sl. No. 2).

How income is computed (section 58(2), Table: Sl. No. 1)

• Turnover limit: total turnover or gross receipts of the tax year must not exceed ₹2 crore; the limit is ₹3 crore if amounts received in cash do not exceed 5% of turnover. A cheque or draft that is not account payee counts as cash (section 58(9)).
• Deemed profit: the higher of (a) 6% of turnover received by account payee cheque, bank draft or electronic mode during the year or before the due date of the return, plus 8% of the rest of the turnover, and (b) the profit the assessee claims to have actually earned.

Example (our own): a trader in Indore with turnover of ₹1.5 crore, of which ₹1.2 crore is received digitally, declares at least 6% of ₹1.2 crore + 8% of ₹30 lakh = ₹7.2 lakh + ₹2.4 lakh = ₹9.6 lakh.

Other provisions

1. No further deduction, loss or allowance is allowed against the deemed profit (section 58(4)); the written down value of assets is computed as if depreciation had been allowed each year (section 58(6)).
2. An assessee who declares a lower profit, and whose total income exceeds the exemption limit, must keep books under section 62 and get them audited under section 63, furnishing the audit report by the specified date, one month before the due date of the return (section 58(3); section 63).
3. Lock-in: if an assessee who has used the scheme declares profit otherwise in any of the next five years, he cannot use it for the following five years, and must keep books and get them audited if his income exceeds the exemption limit (section 58(7)-(8)).

Advantages

1. No need to maintain detailed books of account or to get them audited.
2. Simple, low-cost compliance: income is a known percentage of turnover.
3. Certainty: the declared income is not disturbed for want of vouchers or records.
4. The lower 6% rate rewards digital receipts and so encourages a cashless business.
5. It reduces disputes and assessment work for both the taxpayer and the department.