Section 44AD(4) and 44AD(5) penalise assessees who move in and out of the presumptive scheme opportunistically. Once an eligible assessee declares income under 44AD in a year, and does not declare income under 44AD in any one of the five assessment years that follow, presumptive taxation is barred for the five assessment years succeeding that default. In any of those barred years where total income exceeds the basic exemption limit, the assessee must maintain regular books of account under Section 44AA and get them audited under Section 44AB — even though turnover may be well within the normal 44AB threshold. This is a common trap for assessees who opt in during a low-income year and opt out once profits rise — verify the assessee’s opt-in history for the preceding five years before assuming 44AD is still available.
Section 44ADA does not carry an equivalent statutory lock-in on the professional — moving in and out of 44ADA year to year does not by itself trigger the 44AD(4)/(5) consequence, though the normal 44AB thresholds apply for any year the scheme is not used.
Section 44AD lets eligible small businesses declare a minimum of 8% of turnover as taxable profit (6% for the portion of turnover received through banking channels), without maintaining regular books of account or a tax audit. The base turnover limit is ₹2 crore. Finance Act 2023 inserted an enhanced limit of ₹3 crore, effective from AY 2024-25, available only where aggregate cash receipts during the year do not exceed 5% of total turnover — this remains the current threshold for FY 2026-27 / AY 2027-28.
Section 44ADA offers the equivalent relief to specified professionals (legal, medical, engineering, architectural, accountancy, technical consultancy, interior decoration, and others notified) — deemed profit is 50% of gross receipts. The base limit is ₹50 lakh, enhanced to ₹75 lakh where at least 95% of gross receipts are through banking channels (i.e. cash receipts ≤5%) — the same structural test as 44AD, applied to receipts rather than turnover.
A taxpayer may always declare profit higher than the deemed rate. Declaring profit lower than the deemed rate is permitted only by exiting the presumptive scheme entirely — which, for 44AD, activates the Section 44AD(4)/(5) five-year lock-out and, once total income exceeds the basic exemption limit, mandatory books and tax audit for the following years.
A trader has turnover of ₹1.4 Cr through banking channels and ₹0.6 Cr in cash, total ₹2.0 Cr, in FY 2025-26.
