Section 44AD presumptive taxation: profit calculation with examples

Section 44AD of the Income-tax Act, 1961 – now Section 58 of the Income-tax Act, 2025, merged in a table with the schemes for professionals and transporters – lets small businesses compute income as a fixed percentage of turnover. It saves the cost of detailed books and audit and reduces disputes.

Who is eligible

Presumptive rates

You can always declare a higher profit. Once income is computed under 44AD, all business expenses (including depreciation, partner salary and interest) are deemed allowed.

Worked example 1: kirana and wholesale trader

Example: Rakesh runs a grocery wholesale business in Alipur. Turnover in FY 2025-26: ₹1.85 crore, of which ₹1.70 crore was received through bank/UPI and ₹15 lakh in cash.

His actual profit, by his own estimate, is about 5%. Declaring 6.2% average avoids books and audit. Under the new regime, tax on ₹11,40,000 (with no other income) is nil because of the ₹12 lakh rebate – a significant advantage.

Worked example 2: the ₹3 crore limit

Example: Neha Enterprises, a partnership firm in Wazirpur, has turnover of ₹2.75 crore, with cash receipts of ₹11 lakh (4%).

• Cash receipts ≤ 5% → limit is ₹3 crore → eligible.
• Presumptive income = 6% × ₹2.64 crore + 8% × ₹11 lakh = ₹15,84,000 + ₹88,000 = ₹16,72,000.
• Firm tax at 30% + 4% cess (no surcharge below ₹1 crore) ≈ ₹5,21,664.
• No deduction for partners' remuneration or interest.

If cash receipts were 7%, the limit would be ₹2 crore and the firm would be out of 44AD, needing books and a tax audit.

Opting out and the five-year lock-in

If you opt for 44AD in a year and then declare lower profit in any of the next five years, you cannot use 44AD for the following five years. During that period, you must maintain books and get an audit whenever income exceeds the basic exemption limit.

Example: A trader opts for 44AD in FY 2023-24, declares 4% in FY 2025-26 (opting out). He cannot use 44AD from FY 2026-27 to FY 2030-31.

Books and records

Formal books under Section 44AA are not required for 44AD cases, but you should keep:

• bank statements and UPI reports to prove the digital/cash split;
• purchase and sales invoices (GST records);
• stock details;
• records supporting turnover in the return (it is matched with GST returns and AIS).

Advance tax

Pay 100% by 15 March. Missing it attracts interest of 1% per month under Section 234C for the March shortfall and 234B if unpaid by 31 March.

ITR form

ITR-4 (individuals, HUFs, firms other than LLPs) if total income ≤ ₹50 lakh and no other disqualification; otherwise ITR-3 (individuals/HUFs) or ITR-5 (firms).

Under the 2025 Act

From Tax Year 2026-27, the scheme is in Section 58 with the same limits and rates. The audit trigger for declaring lower profit is in Section 63. See the tax audit checker.

Common mistakes

• Counting digital receipts received after the return due date as "6%" – they are 8%.
• Using 44AD for commission agents or professionals.
• Partnership firms deducting partner salary from presumptive income.
• Declaring lower profit one year without realising the five-year bar.
• Mismatch between GST turnover and turnover in ITR.

Key takeaway

44AD suits small traders with margins near or above 6–8%. Keep digital receipts high to use the 6% rate and the ₹3 crore limit, pay advance tax by 15 March, and think twice before opting out. Our ITR and accounting teams help traders in Rohini, Narela and Bawana choose and document the presumptive scheme.