Section 44AD presumptive scheme: income at 8%/6% of turnover, with the threshold up to Rs 3 crore

Running a small trading or manufacturing business and dreading the ledger-by-ledger arithmetic of a full profit and loss account? Section 44AD of the Income Tax Act 1961 was written for you. It lets an eligible resident taxpayer declare income at a flat 8% (or 6% for digital receipts) of turnover and skip the burden of maintaining detailed books under Section 44AA or getting a tax audit under Section 44AB. For the assessment year 2026-27 (financial year 2025-26), the turnover ceiling runs up to Rs 3 crore, provided cash dealings stay within 5% of gross receipts. This guide walks through exactly what the section says, a full worked example, the mistakes that trigger scrutiny, and the questions taxpayers ask most.

What the Section Says

Section 44AD offers a presumptive taxation scheme, meaning the law presumes a fixed percentage of your turnover to be your taxable profit, so you do not have to prove actual expenses. It is available only to a resident individual, a resident Hindu Undivided Family (HUF), or a resident partnership firm — but crucially not to a Limited Liability Partnership (LLP) and not to companies. If you are unsure how the scheme fits your filing, our presumptive taxation glossary entry sets out the basics before you commit for the year.

The headline number is the presumptive rate. Income is deemed to be 8% of the total turnover or gross receipts, but this drops to 6% for the portion of receipts collected through banking channels or digital modes (account-payee cheque, bank draft, ECS, UPI, cards or net banking) received during the year or before the due date of filing the return. The 6% concession, introduced to reward cashless business, applies only to the digital slice; any cash turnover is still taxed at 8%. Because the figure is a floor, you are always free to declare a higher profit if your actual margin is better, but you cannot go below the presumed rate without triggering audit obligations under sub-section (5).

The eligibility ceiling has two tiers. The basic turnover limit is Rs 2 crore. It is raised to Rs 3 crore for financial year 2025-26 only if cash receipts (and cash payments) do not exceed 5% of the aggregate turnover — a threshold that pushes small firms towards digital collection. The following table summarises the two-tier eligibility test.

Several categories are expressly kept out of Section 44AD. The scheme does not cover a person carrying on a profession referred to in Section 44AA(1) — such as legal, medical, engineering, architectural, accountancy or technical consultancy work — who must instead look to Section 44ADA. It also excludes anyone earning commission or brokerage income, anyone running an agency business, and the business of plying, hiring or leasing goods carriages already covered by Section 44AE. These exclusions are set out in the Income Tax Department's official reading of the section at incometaxindia.gov.in.

Two consequences flow automatically once you opt in. First, all deductions under Sections 30 to 38 — rent, repairs, depreciation and the like — are deemed to have been allowed, so you cannot claim them again, and the written-down value of your assets is treated as reduced by the notional depreciation. Second, since the Finance Act 2016, a partnership firm can no longer deduct partner's salary or interest separately from presumptive income for years from assessment year 2017-18 onwards. A presumptive taxpayer also enjoys an advance-tax relaxation: instead of four instalments, the entire advance tax is payable in a single instalment by 15 March of the financial year, under the proviso to Section 211(1). You can read more in our advance tax glossary note.

Worked Example

Consider Priya, a resident individual running a garments-trading business in Surat during financial year 2025-26. Her total turnover for the year is Rs 2.4 crore. Because she banks almost everything, only Rs 6 lakh (2.5% of turnover) comes in as cash — comfortably within the 5% limit — so she qualifies for the higher Rs 3 crore ceiling and can use Section 44AD. Her receipts split into Rs 2.34 crore digital and Rs 6 lakh cash.

Applying the two presumptive rates gives her deemed business income. The digital portion is taxed at 6% and the cash portion at 8%, as the table shows.

Priya's presumptive business income is therefore Rs 14,52,000. Assuming she has no other income and files under the default new tax regime for financial year 2025-26, her tax is computed on the slab structure (0% up to Rs 4 lakh, 5% from Rs 4-8 lakh, 10% from Rs 8-12 lakh, 15% from Rs 12-16 lakh). That produces a base tax of Rs 20,000 plus Rs 40,000 plus Rs 37,800, or Rs 97,800, and after the 4% health and education cess the liability is Rs 1,01,712. Note that the standard deduction of Rs 75,000 does not apply here, because it is available against salary income, not presumptive business income.

Because her total income of Rs 14,52,000 exceeds the Rs 12 lakh threshold for the Section 87A rebate in the new regime, she gets no rebate — the enhanced Rs 60,000 rebate only shelters incomes up to Rs 12 lakh. Priya must pay this Rs 1,01,712 as a single advance-tax instalment by 15 March 2026, and she can file the simple ITR-4 (SUGAM) without a tax audit. To sanity-check her liability against the old regime, she can run both side by side on our old versus new regime calculator and confirm the arithmetic on the income tax calculator.

The example also exposes the scheme's trade-off. Suppose Priya's actual net profit after all expenses was only Rs 9,00,000 — a 3.75% margin, common in thin-margin retail. Under presumptive taxation she is still taxed on Rs 14,52,000, roughly Rs 5.5 lakh more than her real profit. In that situation the paperwork saved by 44AD costs her real money, and maintaining regular books under Section 44AA (with an audit under Section 44AB) would be the cheaper route. Presumptive taxation rewards high-margin businesses and penalises thin-margin ones, so the decision is arithmetic, not habit.

Common Mistakes

The single most frequent error seen in Income Tax Department scrutiny is a professional using Section 44AD instead of Section 44ADA. A freelance software engineer, doctor or chartered accountant carries on a profession under Section 44AA(1) and is barred from 44AD; the correct route is Section 44ADA, which presumes 50% of gross receipts as income for receipts up to Rs 75 lakh (raised from Rs 50 lakh where cash is within 5%). Filing the wrong section invites a Section 143(1)(a) adjustment, the subject of our guide on responding to a 143(1)(a) prima facie adjustment notice.

A second trap is the five-year lock-in under Section 44AD(4). Once you declare presumptive income, you must continue for five consecutive assessment years. If you opt out in any of those years — for instance to claim a genuine loss — you are barred from 44AD for the next five assessment years and, if your income exceeds the basic exemption limit, you must maintain books under Section 44AA and get them audited under Section 44AB. Many taxpayers dip in and out year to year, unaware they have forfeited the concession.

Third, taxpayers routinely misclassify cash receipts and lose the Rs 3 crore ceiling. If cash crosses 5% of turnover — say Rs 12 lakh on a Rs 2.2 crore turnover, which is 5.45% — the enhanced limit vanishes and, being above Rs 2 crore, the business falls out of 44AD entirely and into mandatory audit. Track the cash ratio through the year, not at the last minute in March 2026.

Fourth, firms often wrongly deduct partner's remuneration from presumptive income. Since assessment year 2017-18 this is not permitted under Section 44AD; the deemed profit is the final figure. And finally, many presumptive taxpayers miss the 15 March advance-tax deadline, assuming the four-instalment schedule applies. It does not — the whole liability falls due in one instalment, and a shortfall attracts interest under Sections 234B and 234C.

FAQ

Can an LLP use Section 44AD?

No. Section 44AD is confined to a resident individual, a resident HUF and a resident partnership firm. A Limited Liability Partnership is expressly excluded, as are companies. This is set out in the Income Tax Department's statement of the section at incometaxindia.gov.in, and an LLP must therefore maintain regular books.

What is the difference between 8% and 6% under Section 44AD?

The 8% rate is the default presumptive rate on total turnover. The lower 6% rate applies only to the portion of turnover received through banking or digital channels — cheque, draft, ECS, UPI, cards or net banking — provided the money is received during the year or before the return due date. Any cash turnover continues to be taxed at 8%.

Is the Rs 3 crore limit automatic?

No. The basic turnover ceiling is Rs 2 crore. The higher Rs 3 crore limit for financial year 2025-26 applies only if cash receipts do not exceed 5% of aggregate turnover. Cross that 5% line and you revert to the Rs 2 crore test; above Rs 2 crore you leave the scheme and a Section 44AB audit becomes mandatory.

Which ITR form does a 44AD taxpayer file?

Eligible individuals, HUFs and firms declaring presumptive income under Section 44AD file ITR-4 (SUGAM), a simplified return that does not require a full balance sheet or profit and loss account. If you also have capital gains or foreign assets, you may fall out of SUGAM and into ITR-3. Our ITR glossary entry explains the form families.

When is advance tax due under the presumptive scheme?

A 44AD taxpayer pays the entire advance tax in a single instalment by 15 March of the financial year, under the proviso to Section 211(1), rather than the usual four instalments in June, September, December and March. Any shortfall draws interest under Sections 234B and 234C.

Can I claim business expenses on top of the presumptive income?

No. Once you opt for Section 44AD, all deductions under Sections 30 to 38 — including depreciation — are deemed already allowed, and the written-down value of assets is treated as reduced accordingly. The presumed 8%/6% is your final taxable business profit; you cannot layer further expenses on top.

What happens if my real profit is below 6%?

You may declare income lower than the presumptive rate, but if you do and your total income exceeds the basic exemption limit, Section 44AD(5) requires you to maintain books under Section 44AA and obtain an audit under Section 44AB. You also trigger the five-year opt-out bar in Section 44AD(4), so weigh the audit cost against the tax saved before going below the floor.