Budget 2023 : Increasing threshold limits for presumptive taxation schemes

The Budget 2023 has delivered an eagerly anticipated raise in the threshold limit for the presumptive taxation scheme.

Let's decode the effect of Budget 2023 on the increased threshold limits for the presumptive schemes under sections 44AD and 44ADA.

Section 44AD (Clause 16) : The existing provisions of Section 44AD of the Income-tax Act provides for a presumptive income scheme for small businesses. This scheme is available to specific resident taxpayers (i.e., individuals, HUFs, or partnership firms excluding LLPs) engaged in eligible businesses with a turnover or gross receipt of two crore rupees or lower.

Under this scheme, 8% or 6% of the turnover or gross receipt is presumed to be the profits and gains from the business, subject to certain conditions.

Now, in order to simplify compliance and encourage non-cash transactions, it has been proposed to provide that starting April 1, 2024, under Section 44AD of the Act, eligible businesses where at least 95% of receipts and payments is being made through non-cash methods, will have a threshold limit of three crore rupees.

Section 44ADA (Clause 17) :The provisions of Section 44ADA of the Income-tax Act cater to a presumptive income scheme for small professionals. This currently applies to specific resident taxpayers, such as individuals and partnership firms (not including LLPs), who practice a profession listed in section 44AA and have a total gross receipt of less than fifty lakh rupees in a previous year. Currently, 50% of the gross receipt is assumed as the business profits, with any higher amount claimed as taxable.

To encourage non-cash transactions and simplify compliance, it is planned to raise the threshold limit for the presumptive scheme under section 44ADA to seventy-five lakh rupees for professionals listed in section 44AA, effective 1st April, 2024, if the amount received in cash does not surpass 5% of the total gross receipt.

Section 44AB (Clause 15) : Section 44AB of the Act requires business individuals to have their accounts audited if their sales, turnover, or gross receipts surpass one crore rupees in any previous financial year. However, if at least 95% of their receipts/payments are made through non-cash means, the auditing limit increases to ten crore rupees. Individuals in a profession must also have their accounts audited if their gross receipts exceed fifty lakh rupees in a previous year.

This section has been amended to exempt individuals from the auditing requirement under Section 44AB if they declare their profits and gains in accordance with the provisions of Section 44AD or Section 44ADA, as specified above.

The afore-mentioned amendment can be summarised as: 

It may be pertinent to note here that for both Section 44AD and 44ADA, cheques or bank drafts that are not account payee will be deemed as cash receipts.

Additionally, these amendments will become effective from April 1, 2024 and will apply to the assessment year 2024-2025 and following years.

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