Section 44AB(e) & 44AD(4): Tax Audit After Opting Out of 44AD

Section 44AD(4) and Section 44AB(e) deal with a specific situation: an eligible business has used the presumptive taxation scheme under Section 44AD and then, within the next five assessment years, declares profit otherwise than in accordance with Section 44AD(1). If Section 44AD(4) becomes applicable, the assessee loses eligibility for Section 44AD for the following five assessment years. Where total income also exceeds the maximum amount not chargeable to tax, books and tax audit are required under Section 44AD(5) read with Section 44AB(e).

Applicable law for this guide: FY 2025-26 / AY 2026-27 continues to be governed by the Income-tax Act, 1961 for return and tax-audit purposes. The Income Tax Department has clarified that Forms 3CA/3CB with Form 3CD continue for AY 2026-27.

Quick answer: do not mix the ₹3 crore and ₹10 crore limits

What is Section 44AD?

Section 44AD is a presumptive taxation scheme for an eligible resident individual, HUF or partnership firm other than an LLP carrying on an eligible business. Certain businesses and persons are excluded, including specified professions, commission/brokerage income, agency business and the goods-carriage business covered by Section 44AE.

Under Section 44AD(1), presumptive business income is generally computed at 8% of turnover or gross receipts. The rate is 6% for qualifying receipts received through prescribed banking or electronic modes within the statutory time.

44AD turnover limit

The normal turnover/gross-receipts ceiling is ₹2 crore. It increases to ₹3 crore where cash receipts during the previous year do not exceed 5% of total turnover or gross receipts. For this 5% test, a cheque or bank draft that is not account-payee is treated as a cash receipt.

What exactly does Section 44AD(4) do?

Section 44AD(4) creates a continuity consequence. If an eligible assessee declares profit under Section 44AD for a previous year and then, in any of the five assessment years succeeding that year, declares profit not in accordance with Section 44AD(1), the assessee becomes ineligible to claim Section 44AD for the five assessment years following the assessment year in which the departure occurred.

Simple example

Suppose an eligible business declares presumptive income under Section 44AD for AY 2024-25. If it does not declare income in accordance with Section 44AD(1) in AY 2026-27, Section 44AD(4) can apply. The assessee then cannot claim Section 44AD for the five assessment years following AY 2026-27, subject to the statutory conditions.

Important: Section 44AD(4) should not be read as a general rule that every person who reports profit below 6% or 8% automatically faces a five-year lockout. The provision specifically operates where an eligible assessee had declared profit under Section 44AD and subsequently departs from Section 44AD within the specified five-assessment-year window.

When does Section 44AB(e) require tax audit?

Section 44AB(e) applies where:

1. the assessee is carrying on business;
2. Section 44AD(4) is applicable; and
3. the assessee's total income exceeds the maximum amount not chargeable to income tax.

When these conditions are met, the accounts of the relevant previous year must be audited and the audit report furnished as prescribed. Section 44AD(5) also requires the assessee to maintain books and other documents under Section 44AA(2).

This is why the ₹10 crore threshold is not the deciding test for Section 44AB(e). The ₹10 crore limit belongs to the enhanced general business-audit threshold under Section 44AB(a). Clause (e) is a separate audit trigger linked to Section 44AD(4) and total income.

Difference between Section 44AB(a) and Section 44AB(e)

₹3 crore under 44AD vs ₹10 crore under 44AB: practical example

Consider an eligible business with turnover of ₹2.70 crore and cash receipts below 5% of turnover. It may fall within the enhanced ₹3 crore Section 44AD eligibility limit, subject to all other conditions.

Now consider a different business with turnover of ₹7 crore. It cannot use Section 44AD merely because its transactions are mostly digital, because ₹7 crore is above the ₹3 crore 44AD ceiling. However, it may still fall outside compulsory audit under the enhanced ₹10 crore Section 44AB(a) threshold if both the cash-receipt and cash-payment conditions are satisfied.

These are two separate provisions serving different purposes.

Does declaring lower profit always require audit?

No single turnover percentage should be used as a shortcut. The correct answer depends on which presumptive provision applies, whether Section 44AD was used in an earlier year, whether Section 44AD(4) has been triggered, the assessee's total income, and whether the general Section 44AB(a) turnover test independently applies.

Tax audit forms for FY 2025-26 / AY 2026-27

The Income Tax Department has clarified that for FY 2025-26 / AY 2026-27, tax audits continue under the Income-tax Act, 1961 using:

• Form 3CA + Form 3CD where the accounts are already required to be audited under another law; or
• Form 3CB + Form 3CD in other cases covered by Section 44AB.

Decision checklist

1. Confirm whether the taxpayer is an eligible assessee and the activity is an eligible business under Section 44AD.
2. Check turnover against the ₹2 crore limit, or ₹3 crore limit where the cash-receipt condition is satisfied.
3. Check whether Section 44AD was actually used in an earlier year.
4. If the taxpayer later departed from Section 44AD, test whether that happened within the five succeeding assessment years for Section 44AD(4).
5. If Section 44AD(4) applies, check whether total income exceeds the maximum amount not chargeable to tax; if yes, examine Section 44AD(5) and Section 44AB(e).
6. Separately test the general Section 44AB(a) turnover thresholds where relevant.

Frequently asked questions

Official references

• Income Tax Department — Section 44AD
• Income Tax Department — Section 44AB
• Income Tax Department — Income Tax Forms / tax audit guidance