Presumptive Taxation for Small Business (44AD)

A shopkeeper, trader or small manufacturer does not have to build a full profit and loss account to pay income-tax. The law offers a short cut: a fixed slice of turnover is treated as the profit, and the books and audit that would otherwise follow fall away. The short cut has limits that are easy to miss. Turnover caps depend on how much was received in cash. The scheme is closed to some businesses altogether. A business that leaves the scheme after using it can be shut out of it for five years, and must then keep books and be audited. This guide sets out who may use the scheme, how the income is worked out, and what happens on leaving it.

Which Act governs which year

• Financial year 2025-26 (assessment year 2026-27) and earlier. The scheme is section 44AD of the Income-tax Act, 1961. Returns for AY 2026-27 are filed under that Act.
• Tax year 2026-27 onwards. The Income-tax Act, 2025 applies from 1 April 2026. Its counterpart is section 58, Table serial number 1, read with section 58(3), (4), (6), (7), (8), (9) and (11). Section 58 also carries the professional scheme (serial number 3, formerly section 44ADA) and the goods carriage scheme (serial number 2, formerly section 44AE) in one table.
• Proceedings for years before 1 April 2026 continue under the 1961 Act by section 536(2) of the 2025 Act.

Section 61 of the 2025 Act is also a presumptive provision, but it deals only with certain non-resident businesses (shipping, aircraft, mineral oil services, turnkey power projects and the like). It is not available to the resident small business this guide is about.

Who may use the scheme

Under the Explanation to section 44AD, an eligible assessee is:

• an individual, a Hindu undivided family or a partnership firm;
• resident in India;
• not a limited liability partnership; and
• one who has not claimed a deduction under sections 10A, 10AA, 10B or 10BA, or under Chapter VIA heading “C” (deductions in respect of certain incomes), for the year.

Section 58(11)(a) of the 2025 Act keeps the same persons and the bar on Chapter VIII-C deductions. The Finance Act, 2026 omitted, from 1 April 2026, the bar on a deduction under section 144 that sub-clause (i) originally contained.

An eligible business is any business other than plying, hiring or leasing goods carriages (which has its own scheme; see Presumptive Taxation for Transporters). Section 44AD(6) shuts out three groups even if they otherwise qualify:

1. a person carrying on a profession referred to in section 44AA(1) (legal, medical, engineering, architectural, accountancy, technical consultancy, interior decoration and notified professions; these have their own scheme, see Presumptive Taxation for Professionals);
2. a person earning income in the nature of commission or brokerage; and
3. a person carrying on any agency business.

Section 58(11)(a)(iii) to (v) of the 2025 Act repeats these exclusions. Companies, LLPs and non-residents are outside both provisions.

The turnover limits

The scheme is open only where total turnover or gross receipts of the year do not exceed a limit. Clause (b) of the Explanation to section 44AD sets it at Rs 2 crore.

The Finance Act, 2023 inserted a proviso, with effect from 1 April 2024 (assessment year 2024-25 onwards). It substitutes Rs 3 crore “where the amount or aggregate of the amounts received during the previous year, in cash, does not exceed five per cent of the total turnover or gross receipts”. A receipt by a cheque or bank draft that is not account payee counts as cash.

The 2025 Act puts the same two limits in column D of serial number 1 of the Table in section 58(2): turnover that “does not exceed two crore rupees”, or “does not exceed three crore rupees, where the amount or aggregate of amounts received, in cash, does not exceed 5% of the total turnover or gross receipts”. Section 58(9) carries the rule on non-account-payee cheques and drafts.

Two points follow from the words. First, the 5 per cent test looks only at receipts. Payments made in cash do not enter it, unlike the tax audit test in section 44AB (see The Tax Audit). Second, the test is of cash received during the year, measured against the whole turnover.

How the income is worked out

Section 44AD(1) deems the profit to be 8 per cent of total turnover or gross receipts, or a higher sum the assessee claims to have earned. The proviso cuts the rate to 6 per cent on turnover received by account payee cheque or draft, electronic clearing through a bank account, or another prescribed electronic mode, “during the previous year or before the due date specified in sub-section (1) of section 139”.

Section 58(2), serial number 1, column E, does the same in two parts. It applies 6 per cent of turnover “received by specified banking or online mode during the tax year or before the due date specified in section 263(1)”, and 8 per cent of the rest. It takes “profit claimed to have been actually earned” if that is higher. “Specified banking or online mode” is defined in section 66(32) as an account payee cheque or draft, electronic clearing through a bank account, or another prescribed electronic mode. Rule 48 of the Income-tax Rules, 2026 lists the other modes, among them debit and credit cards, net banking, IMPS, UPI, RTGS, NEFT and BHIM Aadhaar Pay.

A worked example, using the 1961 Act for financial year 2025-26:

Receipts	Amount	Rate	Deemed profit
By UPI and bank transfer, within the year or before the return due date	Rs 1,60,00,000	6 per cent	Rs 9,60,000
In cash	Rs 6,00,000	8 per cent	Rs 48,000
Total	Rs 1,66,00,000		Rs 10,08,000

Cash is 3.6 per cent of turnover, so the Rs 3 crore limit applies. The turnover is in any case below Rs 2 crore.

What the deemed figure already covers

Under section 44AD(2), every deduction under sections 30 to 38 (rent, repairs, depreciation, salaries and the rest) is “deemed to have been already given full effect to”. No further deduction under those sections is allowed. Under section 44AD(3), the written down value of the business’s assets is computed as if depreciation had been claimed and allowed for each year. Section 44AD contains no provision for deducting salary and interest paid to partners. Section 44AE(3) does contain one, for goods carriage firms.

The 2025 Act’s wording is wider. Section 58(4) says “Any loss, allowance or deduction allowable under the provisions of this Act, shall not be allowed against the income computed” under section 58(2). Section 58(6) carries the written down value rule.

The five-year lock: section 44AD(4) and (5)

The scheme is optional each year, but leaving it has a cost. Section 44AD(4) provides:

“Where an eligible assessee declares profit for any previous year in accordance with the provisions of this section and he declares profit for any of the five assessment years relevant to the previous year succeeding such previous year not in accordance with the provisions of sub-section (1), he shall not be eligible to claim the benefit of the provisions of this section for five assessment years subsequent to the assessment year relevant to the previous year in which the profit has not been declared in accordance with the provisions of sub-section (1).”

For example, a trader who declares under section 44AD for AY 2023-24 and then declares a lower profit for AY 2025-26 cannot use section 44AD for AY 2026-27 to AY 2030-31.

During the lock, section 44AD(5) applies where total income “exceeds the maximum amount which is not chargeable to income-tax”. The assessee must keep books of account under section 44AA(2), and must get them audited and furnish the audit report under section 44AB. Section 44AA(2)(iv) and section 44AB(e) say the same from their side.

The 2025 Act repeats both rules for tax years. Section 58(7) carries the lock: an eligible assessee who declares profit for a tax year under serial number 1 and then declares otherwise in any of the five succeeding tax years loses the benefit “for five tax years subsequent to the tax year in which the profit has not been declared”. Section 58(8) requires books under section 62 and audit under section 63 where total income exceeds the exemption limit.

Section 536 of the 2025 Act does not mention section 44AD by name. A lock that began under the 1961 Act and runs into tax years under the 2025 Act therefore depends on the general savings in section 536(2). Clause (b) preserves any “obligation or liability acquired, accrued or incurred” under the repealed Act. Clause (f) deems “any election or declaration made, or option exercised” under it to have been made under the corresponding provision of the 2025 Act.

Declaring less than the presumptive rate without a lock

Under the 1961 Act, an assessee whose turnover is within the limit may declare a profit below 8 or 6 per cent in a year when no lock under section 44AD(4) applies. The tax audit is then decided only by the ordinary thresholds in section 44AB(a). Section 44AB(e) reaches only cases where “the provisions of sub-section (4) of section 44AD are applicable”. Books under section 44AA(2) are required if income or turnover passes that section’s limits.

The 2025 Act is stricter. Section 58(3) provides that any assessee in column C of the Table who claims that actual profits are lower than the computed figure, and whose total income exceeds the exemption limit, “shall be required to” keep books under section 62 and get the accounts audited under section 63. Serial number 2 of the Table in section 63(1) also requires audit where profits from a business referred to in section 58(2) “are claimed to be lower than the deemed profits”. That entry repeats no total income condition.

Advance tax and the return

An assessee who declares under section 44AD(1) pays the whole of the year’s advance tax in one instalment by 15 March. Section 211(1)(b) of the 1961 Act and section 408(2) of the 2025 Act provide for this. Interest for a shortfall is computed only at that date. The procedure is in Advance Tax and Self-Assessment Tax.

Under the first proviso to section 44AB, substituted by the Finance Act, 2023 with effect from 1 April 2024, the tax audit “shall not apply to a person, who declares profits and gains for the previous year in accordance with the provisions of sub-section (1) of section 44AD”. Section 63(2) of the 2025 Act is to the same effect.

The return due date for AY 2026-27 follows from Explanation 2 to section 139(1), which the Finance Act, 2026 substituted with effect from 1 March 2026. A business whose accounts are not required to be audited falls in serial number 3, with a due date of 31 August. Any other assessee not in serial numbers 1 to 3 has 31 July. The 2025 Act’s section 263(1)© Table has the same dates for tax year 2026-27 onwards.

What to have ready

• Turnover for the year, split by mode of receipt. This comes from the sales register, bank statements and the payment gateway or UPI settlement reports. The split decides both the 6 and 8 per cent figures and the Rs 2 crore or Rs 3 crore limit.
• Receipts after the year end. The 6 per cent rate covers digital receipts up to the return due date, so these are needed from bank statements for April to the due date.
• A check of the exclusions. These are commission, brokerage, agency and specified professions, and any Chapter VIA-C deduction claimed.
• The previous five years’ returns. These show whether a section 44AD(4) lock is running.
• Advance tax challans paid by 15 March. These are on e-Pay Tax Payment History and Form 26AS.
• Financial particulars the return asks for, typically closing balances of debtors, creditors, stock and cash, taken from the business’s own records.

Filing

ITR-4 (Sugam) is the simplified form for presumptive income. The e-filing portal’s page for individuals with business or profession describes it as applicable to a resident individual, HUF or firm (other than LLP) “having total Income up to ₹ 50 lakh” and presumptive income under section 44AD, 44ADA or 44AE. The portal lists exclusions, among them:

• a director of a company;
• a person with unlisted equity shares;
• a person with foreign assets or income;
• a person with losses brought forward or to be carried forward;
• a person with short-term capital gains; and
• a person with long-term gains under section 112A above Rs 1.25 lakh.

The portal also notes that ITR-4 “is not mandatory”. Others use ITR-3 (individuals and HUFs) or ITR-5 (firms). Step-by-step walkthroughs are in Filing ITR-4 for a Small Trader under Section 44AD and, for a trader who has opted out and been audited, Filing ITR-3 after Opting Out of 44AD. The return must then be verified; see E-Verifying a Return.

What can and cannot be changed afterwards

A return declaring income under section 44AD can be revised within the time in section 139(5). A return filed late, or a lower declaration that should have carried an audit report, brings the consequences in Belated and Revised Returns and The Tax Audit.

Summary

1. Fix the Act: section 44AD for FY 2025-26 and earlier; section 58(2), serial number 1, from tax year 2026-27.
2. Check eligibility: a resident individual, HUF or non-LLP firm, with no Chapter VIA-C (now VIII-C) deduction, and not a professional, commission agent, broker or agency business.
3. Check turnover: up to Rs 2 crore, or Rs 3 crore if cash receipts are within 5 per cent of turnover (AY 2024-25 onwards).
4. Compute: 6 per cent of turnover received through banking or online modes by the return due date, 8 per cent of the rest, or a higher actual figure.
5. Before declaring a lower profit, look back five years. Leaving the scheme locks it for five years, and during the lock books and audit are required if income exceeds the exemption limit.
6. Pay all advance tax by 15 March, file ITR-4 (or ITR-3 or ITR-5) by the due date (31 August for AY 2026-27 non-audit cases), and verify it.

The next guide covers the parallel scheme for professionals under section 44ADA.