Stox N Tax

Presumptive Taxation: New Limits and Compliance Tips

1. Introduction

Presumptive taxation schemes were introduced under the Income-tax Act, 1961, with the intent to simplify compliance for small businesses and professionals. Over the years, these schemes—specifically under Section 44AD, 44ADA, and 44AE—have played a crucial role in easing the tax burden and procedural requirements for eligible assessees. However, the Finance Act, 2023, introduced substantial amendments to rationalize these provisions, address misuse, and align tax benefits with scale of operations.

The amendments, effective from Assessment Year 2024–25, seek to fine-tune eligibility thresholds, restrict benefits for high-turnover entities, and increase the ambit of digital compliance. This article explores the modified provisions in detail and their practical impact on taxpayers and practitioners.

2. Overview of Presumptive Taxation Provisions

SectionApplicable ToPresumptive RateTurnover Limit (Pre-Amendment)
44ADEligible Businesses (Non-Company/LLP)6%/8% of Turnover₹2 crore
44ADAProfessionals (as per Sec. 44AA)50% of Gross Receipts₹50 lakh
44AETransporters (Goods carriages ≤10)₹1,000/₹7,500 per ton/dayN/A

3. Key Amendments via Finance Act, 2023 (Applicable from AY 2024–25)

3.1 Increase in Thresholds (Only for Non-Cash Transactions)

  • Section 44AD:
    The turnover limit has been increased from ₹2 crore to ₹3 crore, provided cash receipts do not exceed 5% of total turnover.
  • Section 44ADA:
    The gross receipt limit for professionals is increased from ₹50 lakh to ₹75 lakh, provided cash receipts do not exceed 5% of total receipts.

💡 This promotes digital transactions while discouraging cash-based businesses.

4. Analysis of the 5% Cash Threshold Condition

4.1 Interpretation and Compliance

  • The term “cash receipts” includes cheques or bank drafts not account payee (as clarified by CBDT).
  • To qualify for enhanced limit (₹3 crore/₹75 lakh), 95% or more of receipts must be:
    • Through account payee cheques or drafts, or
    • Electronic clearing systems or
    • Prescribed electronic modes (e.g., UPI, NEFT, IMPS).

4.2 Practical Compliance Considerations

  • Businesses and professionals must maintain proper records of mode of receipts.
  • A small deviation beyond 5% cash threshold will disqualify enhanced limits, falling back to ₹2 crore / ₹50 lakh respectively.
  • Use of non-account payee cheques, even if banked, may be treated as cash receipt.

5. Section-wise Practical Implications

5.1 Section 44AD – Business Assessees

  • Applicable To: Resident Individuals, HUFs, Partnership Firms (not LLPs)
  • Presumptive Income:
    • 8% of turnover (general)
    • 6% if received digitally
  • Key Change: Enhanced threshold of ₹3 crore now allows slightly bigger businesses to opt for presumptive income if they are predominantly cashless.

📌 Example: A Kirana shop with ₹2.8 crore turnover and ₹10 lakh in cash sales (3.57%) can now opt for 44AD.

5.2 Section 44ADA – Professionals

  • Applicable To: Resident Individuals engaged in professions specified under Sec 44AA (e.g., CA, lawyer, architect, doctor)
  • Presumptive Income: 50% of gross receipts
  • Enhanced Limit: ₹75 lakh, subject to ≤5% cash receipts

📌 Example: A practicing architect receiving ₹72 lakh annually, with ₹3 lakh in cash (4.2%) can opt under new 44ADA limit.

5.3 Section 44AE – Transporters

  • No Change in Core Provisions, but digital enforcement is becoming stricter.
  • The scheme remains limited to:
    • ≤10 goods vehicles
    • Presumptive income per vehicle/day (depending on weight)

6. Strategic Considerations for Taxpayers

✅ When to Opt Presumptive Scheme

  • Low expense base (e.g., professionals working solo)
  • No audit requirement
  • Simpler compliance and record keeping
  • To avoid scrutiny on profit margins or documentation

❌ When to Avoid

  • High actual expenses (profit margin below presumptive)
  • Desire to claim deductions (e.g., depreciation, interest, rent)
  • Having losses to carry forward (presumptive income disallows that unless books are maintained)

✍️ Tip: If declaring income lower than presumptive rate, taxpayer must maintain books and get accounts audited under Section 44AB(e).

7. Implications on Other Provisions

💼 TDS Applicability (Sec. 194J / 194C / 194H)

Opting presumptive scheme has no bearing on TDS liability of the payer. TDS must still be deducted as per the relevant section.

🧾 GST Compliance

Turnover limits for presumptive taxation are separate from GST thresholds. A person may still be liable for GST if turnover exceeds ₹20/40 lakh, regardless of presumptive scheme under Income-tax Act.

8. Audit Requirements – Clarity Under Section 44AB

ScenarioIs Audit Required?
Turnover ₹2.8 Cr, >5% cash receiptsYes (if not opting 44AD)
Turnover ₹2.8 Cr, <5% cash receipts, opting 44ADNo
Receipts ₹70 lakh, professional, >5% cashYes, if not opting 44ADA

Audit under Section 44AB becomes mandatory if the taxpayer opts out of presumptive scheme despite being eligible, and declares lower income than deemed profit rate.

9. Conclusion

The amendments to presumptive taxation provisions are a step toward promoting digitization and transparency, offering relaxation to compliant taxpayers while tightening scrutiny on cash-intensive transactions. The increased threshold limits under Sections 44AD and 44ADA are a welcome move for small businesses and professionals with clean, digital books.

Tax professionals should proactively advise clients on:

  • Ensuring cash transactions stay within 5%
  • Filing returns accurately within time
  • Evaluating if presumptive or normal taxation suits their profile

✅ Quick Summary Table

SectionOld LimitNew Limit (if ≤5% cash)Presumptive Income
44AD₹2 crore₹3 crore6% / 8% of turnover
44ADA₹50 lakh₹75 lakh50% of receipts

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