Published 7 May 2026
Meet Yuvraj Saluja, 39, who runs Saluja General Store, a neighbourhood kirana in Hazratganj, Lucknow. Annual turnover ₹70 lakh – well under the ₹2 crore Section 44AD ceiling. He chooses to declare income under the presumptive scheme – 6% on digital receipts, 8% on cash receipts – which means his profit is deemed rather than computed from books, he doesn’t file a Trading or P&L account in ITR-4, and he doesn’t get audited (first proviso to Sec 44AB).
This is the typical small-business filer in India. ITR-4 Sugam is deliberately simpler than ITR-3: the entire Schedule BP collapses into a one-row “deemed income” entry. The price you pay for this simplicity: no expense deduction, no depreciation, no losses allowed, and a 5-year lockout if you ever opt out.
This article walks Yuvraj through the entire filing – eligibility, the digital-vs-cash split, common 44AD pitfalls, and the regime comparison.
1. Section 44AD eligibility
| Eligibility | Limit |
|---|---|
| Type of taxpayer | Individual / HUF / Firm (not LLP, not company) |
| Type of business | Any business EXCEPT plying / hiring / leasing of goods carriages (which is 44AE), agency / commission / brokerage business, or specified profession (44ADA) |
| Turnover ceiling | ₹2 crore standard; ₹3 crore if cash receipts ≤ 5% of total turnover |
| Residential status | Resident (ROR / RNOR). NRI cannot use 44AD. |
Yuvraj qualifies on all counts: individual, retail trade, ₹70L turnover (well under ₹2 cr), resident.
The ₹3 crore figure is the first proviso to Explanation (b)(ii) of Section 44AD, inserted by the Finance Act, 2023 with effect from AY 2024-25; a cheque or draft that is not account payee counts as cash (second proviso).
What if you cross ₹3 cr? 44AD becomes unavailable for that year. You file ITR-3 with full books + P&L + BS. Going back to 44AD is allowed in a later year if you fall below the threshold again, provided you haven’t triggered the Sec 44AD(4) opt-out lockout.
2. The deemed-income percentages
| Receipts type | % deemed as income |
|---|---|
| Received by account payee cheque or draft, ECS through a bank account, or another prescribed electronic mode – during the year or before the Section 139(1) due date | 6% |
| All other receipts, including cash | 8% |
If actual margin is higher than presumptive, you can voluntarily declare the higher figure. You cannot declare lower without triggering the Sec 44AD(4) lockout (see Section 5 below).
For Yuvraj:
- ₹56,00,000 digital × 6% = ₹3,36,000
- ₹14,00,000 cash × 8% = ₹1,12,000
- Total deemed business income: ₹4,48,000
The rates are those in Section 44AD(1) and its proviso.
Why 6% vs 8% matters. Each rupee received through the specified modes is deemed at 6% rather than 8% of turnover – a 2-point difference in deemed income, not in tax. For Yuvraj’s mix, the cash portion adds ₹14L × 2% = ₹28,000 of deemed income versus a fully-digital business; at his income the Section 87A rebate removes the tax under either regime, so it costs him nothing in tax this year.
3. What’s NOT allowed under 44AD
- No detailed P&L. No Trading account, no Balance Sheet, no expense disclosure. ITR-4’s Schedule BP collapses to a single “deemed income” row.
- No depreciation deduction. Treated as already absorbed in the 6%/8% deemed margin. Note: WDV of assets continues to be tracked in the books for future relevance (Sec 44AD(3) deemed depreciation), but it does not flow into ITR-4.
- No business expenses. Not separately deductible.
- No business loss. 44AD by design assumes profit. You cannot declare a loss on presumptive.
- No carry-forward of pre-existing business losses. If you had business losses from earlier years (when on ITR-3), they cannot be set off in a 44AD year on ITR-4. Schedule CFL is unavailable.
- No capital gains other than Section 112A long-term gains of up to ₹1.25 lakh. Anything more forces escalation to ITR-3.
- Multiple house properties (only ONE allowed in ITR-4).
- No agricultural income > ₹5K. Forces ITR-3.
What IS allowed:
- Chapter VI-A deductions (80C, 80D, 80CCD(1B), 80TTA, etc.) – still available subject to regime choice.
- Salary income – ITR-4 supports salary alongside 44AD.
- One house property (self-occupied or let-out).
- Other Sources (savings interest, FD interest, family pension – but limited; large OS may force ITR-3).
4. What you need
Less than for ITR-3:
| Document | Why |
|---|---|
| Bank statements | Digital vs cash split; cross-check against your declared receipts. |
| GST returns (1, 3B) | If GST-registered, turnover should match. |
| 80C / 80D investment proofs | If old regime turns cheaper. |
| Form 16 | If you also have salary income. |
| PAN, Aadhaar | Standard. |
| Bank account | For refund or ECS. |
ITR-4 asks for no P&L, balance sheet, audit report or depreciation schedule. Books are a separate question: Sec 44AA(2) requires an individual carrying on business to keep them where business income exceeded ₹2.5 lakh or turnover exceeded ₹25 lakh in any of the three preceding years (or, for a new business, is likely to), and under clause (iv) where Sec 44AD(4) applies and income exceeds the basic exemption limit. The section makes no exception for income declared under Sec 44AD.
5. The Sec 44AD(4) opt-out lockout (a one-way door)
The biggest 44AD pitfall: once you opt out, you’re locked out for 5 years.
Sec 44AD(4): If a taxpayer declares profit under 44AD for a year and, in any of the next five assessment years, declares profit otherwise than in accordance with Section 44AD(1), 44AD is unavailable for the five AYs after the year of that departure. Separately, Section 44AD(5) requires books and an audit in that case if total income exceeds the basic exemption limit.
Practical implication for Yuvraj:
- He’s choosing 44AD for AY 2026-27.
- If next year his actual margin drops to say 3% and he wants to honestly declare ₹2.1L on ₹70L turnover (instead of the deemed ₹4.48L), he must opt out → ITR-3 + audit (if income > basic exemption) → 5-AY lockout begins.
- The bar would cover AY 2028-29 to AY 2032-33; 44AD would be available again from AY 2033-34.
This is why “declare 44AD or not” is a multi-year decision, not a one-year tactical choice.
6. Step-by-step walkthrough
Step 1 – Sign in
Step 2 – Skip last-year import
Step 3 – Personal information
Step 4 – Questionnaire
- Income sources: tick Business / Profession.
- Sub-flag “Are you using presumptive scheme (44AD/ADA/AE)?”: Yes → 44AD.
- Other heads: leave salary / CG / HP off (none apply).
Routes to ITR-4 Sugam.
Step 5 – 44AD presumptive section
Open the Business / Profession card. ITR-4’s BP card is deliberately tiny – just one row per business:
- Business name: Saluja General Store
- Business code (NIC): 9001 (Wholesale / retail trade – food & groceries)
- Description: Retail trade of grocery, FMCG, packaged food
- Receipts via digital channels: ₹56,00,000
- Receipts via cash: ₹14,00,000
- Other receipts (e.g. cheque): ₹0
BharatTax automatically computes:
| Bucket | Receipts | Rate | Deemed income |
|---|---|---|---|
| Digital | ₹56,00,000 | 6% | ₹3,36,000 |
| Cash | ₹14,00,000 | 8% | ₹1,12,000 |
| Total | ₹70,00,000 | – | ₹4,48,000 |
Cross-check against GST. If you’re GST-registered, your annual turnover from GSTR-3B (sum of taxable + nil-rated + exempt + non-GST) must reconcile with the ₹70L declared here. AIS picks up GST data and shows variance flags. Branch transfers, exempt supplies, and composition-scheme switches are common reconciliation reasons.
Step 6 – Other Sources
- Savings bank interest: ₹8,000 (auto-eligible 80TTA up to ₹10K).
Step 7 – Chapter VI-A (old regime path)
44AD does not restrict Chapter VI-A. Yuvraj claims:
- 80C (PPF ₹1,00,000 + LIC premium ₹50,000): ₹1,50,000
- 80D (self, age 39, not senior): ₹25,000
- 80TTA (savings interest): ₹8,000
New regime under 44AD. The new regime restricts VI-A to 80CCD(2) (employer NPS contribution), 80CCH(2) and 80JJAA (Section 115BAC(2)(i)). 44AD doesn’t change that. Up to ₹12 lakh of total income the new regime’s 87A rebate removes the tax anyway; above that, which regime costs less depends on the deductions. Compare both.
Step 8 – Schedule TI
| Line | New regime | Old regime |
|---|---|---|
| Income from PGBP (44AD deemed) | ₹4,48,000 | ₹4,48,000 |
| Income from Other Sources | ₹8,000 | ₹8,000 |
| Gross Total Income | ₹4,56,000 | ₹4,56,000 |
| Less: Chapter VI-A | – | ₹1,83,000 |
| Total Income (Sec 288A) | ₹4,56,000 | ₹2,73,000 |
Step 9 – Compute tax
| New regime | Old regime | |
|---|---|---|
| Tax on slab | ₹2,800 | ₹1,150 |
| 87A rebate | ₹2,800 (TI < ₹12L → full rebate) | ₹1,150 (TI < ₹5L → full rebate) |
| Cess 4% | ₹0 | ₹0 |
| Total tax | ₹0 | ₹0 |
Both regimes produce zero tax. Filing is still required: his total income exceeds the basic exemption limit under either regime (Section 139(1)(b)), and the rebate reduces tax, not income. He benefits from:
- Sec 87A rebate – both regimes (NEW: ₹60K cap up to ₹12L; OLD: ₹12.5K cap up to ₹5L). His taxable amount is below both ceilings → full rebate → ₹0 tax.
- AY 2026-27 widened NEW basic exemption (₹4 lakh, up from ₹3 lakh in AY 2025-26). His PGBP itself is ₹4.48L, mostly inside the new exemption.
The return also serves as proof of business income for visa / loan applications.
Step 10 – Confirm regime, finalise return
Either regime gives ₹0 tax. Yuvraj confirms New Regime (default, simpler, fewer schedules to maintain in BharatTax UI for next year’s filing).
7. Common mistakes
- Mixing 44AD with capital gains in same year. Any CG other than Section 112A long-term gains of up to ₹1.25 lakh forces ITR-3 (rule 12(1)(ca)(ii)).
- Cash receipts > 5% of turnover when claiming the ₹3 cr ceiling. The digital safe harbour requires cash ≤ 5%. If you cross 5%, the ₹2 cr ceiling applies – and if your turnover is between ₹2-3 cr, you’re suddenly ineligible for 44AD altogether.
- Declaring less than 6% / 8%. Within five years of a 44AD year, this triggers the Sec 44AD(4) bar (5 years off 44AD) and, where total income exceeds the basic exemption limit, books and an audit under Sec 44AD(5) and 44AB.
- Cross-checking turnover wrongly with GST. ITR turnover should match GSTR-3B turnover (with documented reconciling items: branch transfers, exempt supplies, etc.). AIS picks up GST data → flags variance.
- Forgetting that 44AD doesn’t allow Chapter VI-A in new regime. New regime always restricts VI-A regardless of 44AD – only 80CCD(2) (employer NPS), 80CCH(2) and 80JJAA survive (Section 115BAC(2)(i)).
- Treating digital + cash as one bucket. Two buckets, two rates. Don’t average.
- Multiple house properties. ITR-4 allows only one HP. Two-or-more-HP filers must escalate to ITR-3.
8. Frequently asked questions
Q: My turnover is ₹2.5 cr but cash component is 3% only. Eligible for 44AD? A: Yes – Finance Act 2023 raised 44AD ceiling to ₹3 cr if cash receipts ≤ 5% of total turnover. You qualify.
Q: I have salary + 44AD business + one rented HP. ITR-4? A: Yes – ITR-4 supports salary + 44AD + ONE HP + limited OS. Same form. Salary goes in the salary card, HP in the HP card, presumptive business in the BP card.
Q: I declared 5% net profit (below presumptive). Audit? A: If 44AD was used in any of the five preceding years, yes – Sec 44AD(4) bars 44AD for the next five years, and Sec 44AD(5) requires books and an audit where total income exceeds the basic exemption limit. Either way, the return moves to ITR-3.
Q: Can I declare 44AD on partnership / firm income? A: Yes – partnership firms (regular, not LLPs) are eligible for 44AD. Same 6% / 8% rates apply. Note: salary / interest paid to partners is NOT separately deductible against the firm’s 44AD income (already absorbed in the deemed margin).
Q: I bought a delivery scooter for ₹70K – can I claim depreciation? A: No – 44AD deems all expenses including depreciation as absorbed in the % cap. You cannot claim them separately. Keep the asset register internally for if you later opt out and need WDV.
Q: I have cash receipts ₹4L (out of ₹70L). Cash > 5%? A: ₹4L / ₹70L = 5.7% > 5%. So:
- The 6% / 8% rates still apply normally.
- You can’t claim the ₹3 cr digital safe harbour (you’re well below ₹2 cr anyway, so this point is moot for Yuvraj).
- The cash portion ₹4L gets 8% rate (not 6%).
Q: I run two businesses – a kirana and an online tuition. Both 44AD? A: Yes – multiple 44AD-eligible businesses can be declared separately on ITR-4. Each gets its own row in the BP card with its own digital / cash / deemed income split. Specified profession Teaching is not a profession named in Sec 44AA(1), so Sec 44AD(6)(i) does not exclude tuition.
Q: Can I switch from 44AD to ITR-3 voluntarily next year just to claim a depreciation deduction? A: Yes – but declaring profit otherwise than under Sec 44AD(1) within five years of a 44AD year triggers the Sec 44AD(4) 5-year bar.
Q: I’m a freelance graphic designer with ₹40L receipts – 44AD or 44ADA? A: 44AD is not available for a profession named in Sec 44AA(1) or notified under it (Sec 44AD(6)(i)); for those, 44ADA applies (50% deemed margin). Sec 44AA(1) does not name graphic design, so the answer turns on whether the work is technical consultancy or a notified profession. See the 44ADA article.