Section 44AD: What If Actual Profit Is Higher Than 6% or 8%?
ICAI Guidance Note on Tax Audit (Revised 2025) — turnover formula update. The ICAI Direct Taxes Committee’s Tenth Edition (Revised 2025) of the Guidance Note on Tax Audit under Section 44AB updates the F&O turnover method. For tax audits of FY 2025-26 (AY 2026-27) onwards, the turnover formula is:
- Sum of favourable and unfavourable differences on squared-off trades; plus
- Premium received on sale of options — with anti-double-count proviso: if your broker P&L already nets the option-sale premium into the per-trade profit/loss, do not add the premium separately.
- Differences on reverse trades also count.
- Open positions at year-end are picked up when squared off.
- Delivery-settled derivatives use the trade-vs-settlement price difference; if you held the underlying as stock-in-trade, the entire sale value is business turnover.
For AY 2026-27 onward, use the Revised 2025 edition. Earlier assessment years should be checked against the ICAI guidance applicable to that year.
Source: ICAI, Guidance Note on Tax Audit under Section 44AB of the Income-tax Act, 1961 (Revised 2025), Direct Taxes Committee, Tenth Edition, para 5.11(b).
Source basis: This guide is source verified against the official documents listed below. It is educational guidance, not personalized tax advice.
Official sources used: Income-tax Act, 1961 (India Code consolidated PDF); Income-tax Act, 2025 — CBDT (official landing); CBDT: 1961 ↔ 2025 provisions concordance utility; CBDT Notifications (official index); CBDT FAQs on Interplay & Transitions — Income-tax Act 2025; Income Tax e-Filing Portal: individual business/profession help.
Short answer
Section 44AD(1) deems 8% or 6%, or a higher claimed amount, as business profits. A higher actual profit is not suppressed to only 6% or 8%.
Section 44AD is a presumptive-income provision. The pinned Act text supports the 8% presumptive rate, the 6% rate for specified banking/electronic receipts, the five-assessment-year lockout in Section 44AD(4), and the books/audit consequence in Section 44AD(5) when the lockout applies and total income exceeds the basic exemption limit.
What Section 44AD actually does
Section 44AD(1) deems a percentage of turnover or gross receipts to be business profits for an eligible assessee in an eligible business. The Act text extracted for this review says 8%, with a 6% rule for specified non-cash receipts.
It also says deductions under Sections 30 to 38 are deemed to have already been given effect. In plain English, you cannot take presumptive income and then separately deduct the same normal business expenses from that presumptive figure.
The opt-out lockout
Section 44AD(4) says that where an eligible assessee declares profit under Section 44AD and then, within the five assessment years succeeding that year, declares profit not in accordance with Section 44AD(1), the assessee cannot claim Section 44AD benefit for five assessment years subsequent to the assessment year in which the profit was not declared in accordance with Section 44AD(1).
Section 44AD(5) then says that where Section 44AD(4) applies and total income exceeds the maximum amount not chargeable to income-tax, the assessee must keep books under Section 44AA and get them audited under Section 44AB.
The limit caveat
The extracted India Code text says the eligible-business turnover limit is Rs. 2 crore. The ICAI Guidance Note separately notes that the Finance Act, 2023 revised Section 44AD and 44ADA limits upward from AY 2024-25. This batch does not state an exact current enhanced limit as a source-verified claim until that exact current text is separately pinned.
Higher claimed amount
The phrase “or a higher claimed amount” matters. Presumptive taxation sets a deemed floor for eligible cases; it is not a licence to hide a higher real business profit.
ITR-4 is not automatic
The e-Filing portal describes ITR-4 as a form for eligible taxpayers using presumptive income under Sections 44AD, 44ADA, or 44AE, subject to restrictions. If there are brought-forward or carried-forward losses, or the taxpayer is not eligible for presumptive reporting, ITR-3 may be required instead.
Pinned official sources for the points above: CBDT Circulars (official index); CBDT: Income Tax Returns (notified forms); Income Tax e-Filing Portal: ITR downloads; Income Tax e-Filing Portal: individual business/profession help.
Dual-citation framing (AY 2025-26 vs AY 2026-27)
This guide cites two statutes side-by-side because India is mid-transition.
- AY 2025-26 (TY 2024-25) and earlier: the Income-tax Act, 1961 applies. Returns filed in 2025 follow 1961-Act section numbers (43(5), 44AA, 44AB, 44AD, 71, 72, 73, 74, 80, 139, 143, 271B).
- AY 2026-27 (TY 2026-27) onwards: the Income-tax Act, 2025 (Act No. 30 of 2025, assented 21 Aug 2025, commenced 1 Apr 2026 per s.1(3)) applies, with the 1961 Act repealed by s.536. Successor section numbers are 2(31), 2(33), 58, 62, 63, 110, 111, 112, 113, 117, 263, 270, 408, 428. Forms move from 3CA/3CB/3CD to Form 26 under the Income-tax (No. 2) Rules, 2026 (CBDT Notification 22/2026, in force 1 Apr 2026).
When a calendar date is not pinned to a CBDT circular below, treat the date as indicative and reconcile with the e-Filing utility before relying on it.
FAQ
1. Can I declare more than 6% or 8% under 44AD? Yes. Section 44AD(1) includes a higher claimed amount.
2. Can I claim expenses separately after 44AD? No. Section 44AD(2) says deductions under Sections 30 to 38 are deemed to have already been given full effect.
3. Does this decide whether F&O is eligible for 44AD? No. It explains source-verified 44AD mechanics. Eligibility should be checked separately.
Official sources
Source basis: This article is checked against the official documents listed below. It is educational guidance, not personalised tax advice.