Quick answer: Section 44AD lets a small resident business declare a fixed share of its turnover as taxable income — 6% for money received through banks or digital channels and 8% for cash receipts — instead of tracking every expense. If your turnover is up to Rs 2 crore, or up to Rs 3 crore when cash receipts stay within 5%, you can skip books of account and tax audit. This guide covers who can use 44AD, who cannot, and the 5-year rule that catches people out.
What is Section 44AD presumptive taxation?
Under normal rules, a business owner adds up all receipts, subtracts every expense, and pays tax on the profit left over. That means bills, ledgers, and often a tax audit. Section 44AD of the Income-tax Act, 1961 offers a shortcut for small businesses: the law simply presumes your profit.
You declare 6% or 8% of your turnover as income, depending on how customers paid you. That fixed figure becomes your business income. You do not have to prove expenses, and you do not have to maintain detailed books of account. The tax itself is still charged at your normal slab rates — 44AD only changes how the income is worked out, not the rate of tax.
In the Income-tax Act, 2025, which applies from Tax Year 2026-27, presumptive taxation for businesses sits in Section 58. The older Section 44AD number still governs Tax Year 2025-26 and earlier years. This article uses both numbers so you can follow either version.
44AD at a glance
| Point | Rule |
|---|---|
| Who can use it | Resident individuals, HUFs and partnership firms (not LLPs) |
| Turnover limit | Rs 2 crore |
| Higher limit | Rs 3 crore, if cash receipts are 5% or less of total turnover |
| Presumed profit, digital receipts | 6% of turnover |
| Presumed profit, cash receipts | 8% of turnover |
| Books of account | Not required, if income is declared at the presumed rate |
| Tax audit | Not required, if income is declared at the presumed rate |
| Return form | ITR-4 for individuals and HUFs; ITR-5 for partnership firms |
| Advance tax | One single instalment, by 15 March |
Who can use Section 44AD?
Section 44AD is open to three kinds of taxpayers only:
- Resident individuals running a small business, such as a shop, trading firm or small manufacturer.
- Resident HUFs carrying on a business.
- Partnership firms, other than LLPs, carrying on an eligible business.
Companies cannot use 44AD. LLPs cannot use it either, even though a regular partnership firm can. Non-residents are also outside the scheme. If your business is run through a company or an LLP, you must compute profit under the normal rules, with books and audit as applicable.
Who cannot use Section 44AD?
Even if you are an individual or HUF, these businesses are kept out:
- Agency businesses and anyone earning commission or brokerage income, such as insurance agents. Commission income has to be computed under the normal rules.
- Specified professionals covered by Section 44ADA instead — doctors, lawyers, chartered accountants, engineers, architects, technical consultants and interior decorators. Professionals get their own scheme at 50% of gross receipts, covered in our 44ADA guide for freelancers.
- Goods carriage businesses under Section 44AE, which has its own per-vehicle formula.
- Businesses claiming deductions under Sections 10A, 10AA, 10B, 10BA or 80HH to 80RRB.
If only part of your income is commission, that part stays outside 44AD while the rest of the business can still use the scheme, but the split must be kept clean.
The 6% and 8% rates: how the split works
The rate depends on how each rupee reached you, not on the business as a whole:
- 6% applies to turnover received by account payee cheque, account payee bank draft, or an electronic mode such as UPI, net banking, NEFT, RTGS, IMPS or card payment.
- 8% applies to turnover received in cash.
Most businesses today receive almost everything digitally, so in practice most of the turnover is taxed at 6%. The two parts are worked out separately and added together. For example, a trader with Rs 1 crore turnover — Rs 70 lakh digital and Rs 30 lakh cash — declares Rs 4.2 lakh (6% of 70 lakh) plus Rs 2.4 lakh (8% of 30 lakh), a total of Rs 6.6 lakh.
The Rs 3 crore limit and the 5% cash test
The standard turnover limit is Rs 2 crore. It rises to Rs 3 crore only when cash stays small: cash receipts must not exceed 5% of total turnover, and the same 5% test applies to cash payments.
Two quick tests show how this works:
- Turnover Rs 2.8 crore with cash receipts of Rs 12 lakh: 12 lakh is 4.29% of turnover, inside the 5% limit, so the Rs 3 crore limit applies and the business can use 44AD.
- The same Rs 2.8 crore turnover with cash receipts of Rs 16 lakh: 16 lakh is 5.71% of turnover, above the limit, so the limit falls back to Rs 2 crore and the business cannot use 44AD that year.
If your turnover crosses the limit that applies to you, the scheme is closed for that year and normal profit computation applies.
Worked examples
Example 1 — fully digital small shop. Turnover Rs 50 lakh, all received by UPI and bank transfer. Presumed income is 6% of Rs 50 lakh, which is Rs 3 lakh. With no other income, that sits below the basic exemption limit, so no tax is payable. A trader who kept full books might have shown a higher or lower real profit; under 44AD, Rs 3 lakh is the figure that counts.
Example 2 — mixed receipts plus other income. A trader has Rs 1 crore turnover: Rs 70 lakh digital and Rs 30 lakh cash, giving presumed income of Rs 6.6 lakh as worked out above. She also has Rs 8 lakh of other income, so her total income is Rs 14.6 lakh. Under the new-regime slabs, tax is nil on the first Rs 4 lakh, 5% on the next Rs 4 lakh (Rs 20,000), 10% on the next Rs 4 lakh (Rs 40,000) and 15% on the remaining Rs 2.6 lakh (Rs 39,000) — Rs 99,000 in total, plus 4% cess, which comes to Rs 1,02,960. Had her total income been Rs 12 lakh or less, the Section 87A rebate would have wiped the tax out entirely.
What changed and what stayed the same
The scheme itself has not changed in substance. What changed is the law book: from Tax Year 2026-27, the Income-tax Act, 2025 replaces the 1961 Act, and Section 44AD becomes Section 58 of the new Act. The 6% and 8% rates, the Rs 2 crore and Rs 3 crore limits, and the 5% cash test all carry over. The 1961 Act numbers still apply to Tax Year 2025-26 returns.
One related change is worth noting for traders who also pay advance tax: the December instalment rules for regular taxpayers are covered in our advance tax December guide, but 44AD taxpayers follow a simpler schedule, explained below.
Books, audit and declaring lower income
If you declare income at or above the presumed rate, you do not need to maintain books of account, and tax audit under Section 44AB (Section 63 of the 2025 Act) does not apply. That is the main saving the scheme offers.
You can declare a higher income than the presumed figure — for example, to match a loan application — with no penalty. But declaring a lower income changes everything: if your total income also exceeds the basic exemption limit, you must maintain books of account and get them audited. Many small businesses get caught here by declaring a low figure to save tax and then facing an audit that costs more than the tax saved.
The 5-year rule
This is the rule most people miss. Once you opt into 44AD and then opt out, you cannot opt back in for the next five years. During those five years you must maintain books of account and get them audited if the audit conditions apply. So do not treat 44AD as a switch you flip on and off each year. If your margins are thin in one year and you want to declare actual lower profit, weigh the five-year cost before stepping out.
Advance tax: one payment by 15 March
Regular taxpayers pay advance tax in four instalments through the year. A 44AD taxpayer pays the whole advance tax in a single instalment by 15 March of the financial year. Miss that date and interest applies like any other advance-tax shortfall. If your total tax after TDS is Rs 10,000 or less, no advance tax is due at all.
Which ITR form, and do deductions still apply?
- Individuals and HUFs using 44AD file ITR-4 (Sugam), provided total income does not exceed Rs 50 lakh and no other ITR-4 bar applies, such as foreign assets or directorship in a company.
- Partnership firms file ITR-5, not ITR-4, even when they use 44AD.
- If total income exceeds Rs 50 lakh, an individual moves to ITR-3 instead.
Chapter VI-A deductions still apply on top of the presumed income. An 80C investment, health insurance under 80D, or an NPS contribution under 80CCD can still reduce your total income — 44AD only fixes the business profit figure, not the rest of your return. Our revised return guide explains how to correct a return if you picked the wrong form or figure.
44AD vs 44ADA vs 44AE
| Scheme | For whom | Presumed income | Limit |
|---|---|---|---|
| 44AD | Small businesses | 6% digital / 8% cash of turnover | Rs 2 crore, or Rs 3 crore with 5% cash test |
| 44ADA | Specified professionals | 50% of gross receipts | Rs 75 lakh, with the digital-receipts condition |
| 44AE | Goods carriage owners | Fixed amount per vehicle per month | Up to 10 vehicles |
Picking the wrong scheme is a common error: a consultant who files under 44AD instead of 44ADA, or a commission agent who files under 44AD at all, risks a notice. Match the scheme to the activity, not to whichever rate looks lower.
Common mistakes to avoid
- Mixing up the rates: applying 6% to the whole turnover when part of it came in cash. The cash slice is always 8%.
- Ignoring the 5% cash test: crossing into the Rs 3 crore band while cash receipts exceed 5% of turnover.
- Declaring lower income casually: it triggers books and audit, and stepping out can bar re-entry for five years.
- Using ITR-4 for a firm: partnership firms must use ITR-5.
- Forgetting GST: 44AD is an income-tax shortcut only. GST registration and returns follow their own thresholds and rules.
- Missing the 15 March advance-tax date: there is no December or September instalment for 44AD taxpayers, just one payment.
Frequently asked questions
What is Section 44AD in simple words?
Section 44AD is a shortcut for small businesses. Instead of calculating real profit from expenses, you declare 6% of digital turnover and 8% of cash turnover as your income. That figure is taxed at normal slab rates, and you skip books of account and tax audit if you declare at least the presumed amount.
What is the turnover limit for 44AD?
The limit is Rs 2 crore of turnover. It rises to Rs 3 crore when cash receipts are 5% or less of total turnover and cash payments meet the same test. Cross the limit that applies to you and the scheme is not available for that year.
Is the 6% rate for all digital payments, including UPI?
Yes. The 6% rate covers turnover received by account payee cheque, account payee bank draft, or any electronic mode, including UPI, net banking, NEFT, RTGS, IMPS and card payments. Only cash receipts attract the 8% rate.
Can a company or LLP use Section 44AD?
No. Companies and LLPs are both excluded. Only resident individuals, HUFs and partnership firms (other than LLPs) running an eligible business can opt for 44AD.
Can I declare income lower than 6% or 8% under 44AD?
You can, but it ends the shortcut for that year. If your total income exceeds the basic exemption limit, you must maintain books of account and get them audited. And once you step out of the scheme, you cannot opt back in for five years.
Which ITR form do I use for 44AD?
Individuals and HUFs use ITR-4 (Sugam), as long as total income is within Rs 50 lakh and no other bar applies. Partnership firms use ITR-5. If your total income exceeds Rs 50 lakh, an individual files ITR-3 instead.
Can I claim 80C and other deductions with 44AD?
Yes. Deductions under Chapter VI-A, such as 80C, 80D and 80CCD, apply on your total income after the presumed business income is added in. 44AD fixes only the business profit figure; it does not block other deductions.
Does 44AD remove the need to pay advance tax?
No. It changes the schedule, not the duty. A 44AD taxpayer pays advance tax in one instalment by 15 March instead of four instalments. If total tax after TDS is Rs 10,000 or less, no advance tax is needed.
Official sources
- Income Tax e-Filing portal — incometax.gov.in
- Central Board of Direct Taxes — incometaxindia.gov.in
- Income-tax Act, 2025, Section 58 (presumptive taxation) and Section 63 (tax audit), read with the corresponding 1961 Act provisions for earlier years
Reviewed by Asuthod Rathod, CA — Last updated: 28 October 2026
Disclaimer: This article explains the law in simple terms for general information. It is not tax advice for your specific case. For complex situations, such as mixed commission income or crossing the turnover limit mid-year, check with a chartered accountant before filing.
Editorial byline for eircicai income tax guides — covering the Income Tax Act, 2025, section renumbering, regime comparison, and deductions. Content is reviewed by Asuthod Rathod, CA.