Section 44AB vs Section 44AD – Presumptive Taxation (With Examples)
A comprehensive thesis comparing tax audit obligations and presumptive taxation mechanics, with practical examples and guidance for business taxpayers.
Overview of Presumptive vs Audit Regimes
The Indian income tax system offers two broad routes for computing taxable income for businesses: one based on regular books of account and audit requirements and the other based on presumptive taxation schemes. Section 44AB mandates tax audits for businesses exceeding prescribed turnover limits, while Section 44AD offers simplified income computation for small taxpayers. Understanding the distinction between these two sections is critical for compliance, tax planning, and overall financial management. Taxpayers must evaluate their turnover, business nature, expense patterns, and compliance capabilities before choosing the appropriate regime.
Purpose of Sections 44AB and 44AD
Purpose of Section 44AB (Tax Audit)
Section 44AB is designed to ensure accuracy and reliability in financial reporting. It mandates an audit of books of account when turnover exceeds prescribed limits. The audit aims to verify correctness of books, prevent tax evasion, ensure compliance with accounting and tax standards, and provide credibility to financial statements.
Purpose of Section 44AD (Presumptive Taxation)
Section 44AD aims to reduce the compliance burden on small businesses by allowing them to declare income based on a fixed percentage of turnover. It encourages formalization, reduces litigation, and simplifies tax filing for small taxpayers, especially those lacking accounting expertise.
Who Must Follow Which Section
Section 44AB (Tax Audit)
A tax audit under Section 44AB is mandatory for: any business with turnover exceeding ₹1 crore; if the taxpayer opts for the presumptive scheme under 44AD but declares profit lower than prescribed percentages and total income exceeds basic exemption limit; businesses with turnover up to ₹10 crore, provided cash receipts + cash payments do not exceed 5% of total receipts/payments. If the 5% condition is met, the audit threshold rises from ₹1 crore to ₹10 crore.
Section 44AD (Presumptive Tax)
Section 44AD applies to resident individuals, resident HUFs, resident partnership firms (excluding LLPs) engaged in eligible businesses having turnover up to ₹2 crore. Ineligible categories include professionals under Section 44AA(1), commission or brokerage businesses, agencies and businesses earning commission-based income, transport businesses covered under Section 44AE, and LLPs.
Income Computation and Practical Examples
Income Computation Under Section 44AB
Under Section 44AB (regular taxation), taxpayers must maintain books of account and compute taxable income as: Taxable Income = Gross Income – Allowable Expenses – Depreciation – Deductions. Depreciation under Section 32 must be calculated as per tax rules, and all business expenses must be properly documented. The audit verifies accuracy and compliance.
Income Computation Under Section 44AD
Under Section 44AD, income is computed on a presumptive basis, as: 8% of turnover (for cash transactions) and 6% of turnover (for digital mode receipts). No further deductions for expenses are allowed since the presumptive rate already accounts for them. However, eligible deductions under Chapter VI-A (like 80C, 80D) are still allowed.
Books & Depreciation
Under 44AB maintaining books is mandatory; under 44AD books are not mandatory and depreciation is deemed allowed under the presumptive scheme.
Advance Tax and Lock-In
Under 44AB taxpayers must pay advance tax in four instalments; under 44AD taxpayers must pay 100% of advance tax by 15th March. The five-year lock-in rule applies to 44AD—if a taxpayer exits the scheme they cannot re-enter for five years.
Practical Examples
Example 1 – Mr. A: manufacturing business with turnover ₹5 crore and cash receipts <5% ⇒ audit threshold ₹10 crore, no tax audit required but full books must be maintained.
Example 2 – Ms. B: general store turnover ₹80 lakh with 90% digital sales ⇒ 6% of ₹80 lakh = ₹4.8 lakh declared income under 44AD.
Example 3 – Partnership opting out of 44AD ⇒ must maintain books, may be subject to audit, and cannot re-enter 44AD for five years.
Choosing Between 44AB and 44AD
Section 44AB and Section 44AD serve distinct purposes within the tax framework. Section 44AB enforces accountability and audit discipline among medium and large businesses, while Section 44AD promotes simplification for small taxpayers. Choosing between them depends on turnover, profitability, record-keeping capabilities, and future tax planning strategy. Understanding the interplay between audit requirements, presumptive income computations, and the five-year lock-in rule is crucial for avoiding penalties and optimizing tax efficiency.