Audit Rules Under Presumptive Taxation Scheme: IT Act 1961 vs IT Act 2025

Audit Under the Presumptive Taxation Scheme (Business): Income Tax Act 1961 vs. Income Tax Act 2025:

Introduction:

The presumptive taxation scheme has long served as a simplified compliance mechanism for small taxpayers engaged in business. Section 44AD of the Income Tax Act, 1961, enabled eligible assessees to compute taxable income at a prescribed percentage of turnover without maintaining detailed books of accounts, subject to certain conditions. With the introduction of the Income Tax Act, 2025, a parallel yet significantly modified framework has been introduced under Section 58, which revises the presumptive tax regime and substantially alters the audit implications. This article undertakes a comparative analysis of the existing presumptive scheme under Section 44AD of the Income Tax Act, 1961, and the new provisions under Section 58 of the Income Tax Act, 2025, with a particular focus on the computation mechanism, eligibility criteria, audit requirements, and transitional impact for taxpayers.

Let us first examine the existing provisions of Section 44AD, which govern the presumptive taxation scheme for businesses:

Section 44AD {Income Tax Act 1961}:

Sub section (1): In case of eligible assessee engaged in eligible business a sum equal to eight per cent of the total turnover or gross receipts of the assessee in the previous year on account of such business or, as the case may be, or a sum higher than the aforesaid sum claimed to have been earned by the eligible assessee, shall be deemed to be the profits and gains of such business chargeable to tax under the head “Profits and gains of business or profession.

The further proviso to this section states that, in respect of the amount of gross receipts or total turnover received by account payee cheque, account payee draft, or through any electronic clearing system (ECS) or other prescribed electronic modes, the deemed business income shall be 6% instead of 8%, to the extent such receipts are credited through banking channels.

(2): All the deduction stated in section 30 to 38 are deemed to have been allowed to the assesse while calculating such 8 per cent or 6 per cent as the case may be of total turnover or gross receipts.

(3): WDV of the fixed assets should be calculated as if depreciation allowable under the act had claimed and actually been allowed to the assesse.

(4):Where an eligible assessee declares profit for any previous year in accordance with the provisions of this section and he declares profit for any of the five assessment years relevant to the previous year succeeding such previous year not in accordance with the provisions of sub-section (1), he shall not be eligible to claim the benefit of the provisions of this section for five assessment years subsequent to the assessment year relevant to the previous year in which the profit has not been declared in accordance with the provisions of sub-section (1).

(5):In case of assesse to whom provisions of sub section (4) is applicable and whose GTI exceeds basic exemption limit applicable to him, is liable to maintain his books of accounts and get them audited.

(6): Provisions of this section not apply to :(i)a person carrying on profession as referred to in sub-section (1) of section 44AA;(ii)a person earning income in the nature of commission or brokerage; or (iii)a person carrying on any agency business.

Where eligible assesse means an individual, Hindu undivided family or a partnership firm, who is a resident, but not a limited liability partnership firm and ho has not claimed deduction under any of the sections 10A, 10AA, 10B, 10BA or deduction under any provisions of Chapter VIA under the heading C-Deductions in respect of certain incomes” in the relevant assessment year.

And Eligible business means any business except the business of plying, hiring or leasing goods carriages referred to in section 44AE; and whose total turnover or gross receipts in the previous year does not exceed an amount of two crore rupees. {three crore in cases where aggregate receipts in cash does not exceed five per cent of the total turnover or gross receipts}.

Audit requirement under existing provisions:

The current presumptive taxation scheme mandates a tax audit of the books of accounts only in cases where the provisions of sub-section (4) become applicable. Sub-section (4) applies to an assessee who has declared business income under the presumptive taxation scheme in any previous year and subsequently opts out of the scheme. Therefore, the requirement of tax audit arises only when the assessee exits or opts out of the presumptive scheme after having availed it earlier.

Alternatively, in cases where the assessee has never declared income under this section in any previous year, there is no requirement to get the books of accounts audited even if the profit declared is below 8% or 6% of the business turnover.

Therefore, a tax audit is required only in cases where the assessee has declared business income under this section in any previous year and subsequently opts out of the presumptive scheme in a later year. Even in such cases, the audit requirement arises only if the gross total income of the assessee exceeds the basic exemption limit.

Let us now proceed to examine the corresponding provisions under the Income Tax Act, 2025

Section 58(1):The provisions of sections 26 to 54, to the extent contrary to this section, shall not apply to the manner of computation of profits and gains of the specified business or profession in sub-section (2).

(2) The profits and gains of any specified business or profession as mentioned in column B of the Table below, carried on by an assessee specified in column C of the said Table, having total turnover or gross receipts of business or profession during the tax year specified in column D and computed in the manner specified in column E thereof, shall be deemed to be the profits and gains of such business or profession chargeable to tax under the head “Profits and gains of business or profession”

Table

All other conditions enumerated under sub-sections except sub section (3) under this section are identical to the existing provisions of Section 44AD. Sub-section (4) provides that all losses and allowances shall be deemed to have been allowed while computing business income. Sub-section (6) provides that the written-down value (WDV) of assets shall be computed as if the depreciation allowable under the Act has already been claimed and allowed to the assessee. Sub-sections (7) and (8) correspond to sub-sections (4) and (5) of Section 44AD and deal with the consequences of opting out of the scheme. The definition of an “eligible assessee” is also the same under both acts.

The primary change relates to the insertion of sub-sections (3), which significantly impact the applicability of audit provisions. For reference, newly inserted sub-section is mentioned below:

(3) Any assessee mentioned in column C of the Table in sub-section (2), who claims that–

(a) the profits or gains actually earned from the specified business or profession are lower than the profits or gains computed in the manner mentioned in column E of the said Table; and

(b) whose total income exceeds the maximum amount which is not chargeable to tax, shall be required to–

(i) keep and maintain such books of account and other documents as required under section 62; and

(ii) get the accounts audited and furnish a report of such audit as required under section 63.

Insertions of this sub section results in requirement of audit in cases where assesse declares profits of their business lower than 8% or 6%, as the case may be irrespective of whether the assesse has declared income in accordance with this section in any previous year or not, alternatively if income of your business is below 8% or 6%, as the case may be then you are required to get your accounts audited from the Tax Year 2026-27.

Transitional Impact from Section 44AD (Income Tax Act, 1961) to the New Presumptive Scheme under the Income Tax Act, 2025 and Related Audit Requirements

As the new Act comes into effect from 1st April 2026, the following transitional effects may be relevant:

1. Assessees currently subject to tax audit due to opting out of the existing presumptive scheme will continue to remain under audit requirements until the completion of their mandatory five-year period.

2. Assessees intending to declare business income lower than 8% / 6% of turnover may continue to do so up to PY 2025-26 without a tax audit, provided that they have not opted for the presumptive scheme in any of the preceding five previous years.

3. Assessees intending to declare income below 8% / 6% of turnover from Tax Year 2026-27 onward will be required to undergo a tax audit and maintain books of accounts for the subsequent five years, irrespective of previous participation under the presumptive scheme.

4. Assessees whose five-year opt-out restriction ends in PY 2025-26 may again avail the presumptive scheme under the new Act. However, if they choose to declare profits below 8% / 6%, they will still be required to get their books audited.

Following Table provides comparative analysis of Section 44AD of IT Act 1961 vs Section 58 of IT Act 2025:

It is essential to understand the intent of the legislature before applying the provisions of the Income Tax Act, 2025. A plain reading of Section 58 of the new Act makes it evident that the legislative intent is to mandate the audit of businesses declaring income below the prescribed percentage. However, the Department has not yet released any FAQs in relation to this provision. The above interpretation is based on the author’s study and understanding of the New Income Tax Act.

Furthermore, the language used in Section 58(4) of the new Act

‘Any loss, allowance or deduction allowable under the provisions of this Act shall not be allowed against the income computed in the manner specified in sub-section (2)’

is notably different from the wording of the corresponding existing provision under Section 44AD(2)of the Income Tax Act, 1961, which states:

‘Any deduction allowable under the provisions of sections 30 to 38 shall, for the purposes of sub-section (1), be deemed to have been already given full effect to and no further deduction under those sections shall be allowed..”

Therefore, it is necessary to understand whether the deduction of brought-forward losses or other permissible deductions such as “section 123 Deductions in respect of certain payments” etc. is allowed under the new presumptive scheme or not.

Conclusion:

The transition from Section 44AD of the Income Tax Act, 1961, to Section 58 of the Income Tax Act, 2025, represents a fundamental shift in the presumptive taxation landscape. While the core structure of presumptive income computation remains broadly comparable, the insertion of sub-section (3) under Section 58 introduces a mandatory tax audit in cases where the declared profits fall below the prescribed threshold of 8% or 6%, irrespective of the assessee’s past participation in the presumptive scheme. This marks a departure from the current regime, where a tax audit becomes applicable only upon opting out after having availed the benefit in earlier years. Additionally, the revised wording of Section 58(4) raises important interpretational considerations regarding the treatment of brought-forward losses and other deductions. Therefore, assessees must carefully evaluate their tax positions during the transition period and prepare for the enhanced compliance responsibilities effective from the Tax Year 2026-27, pending further clarification and FAQs from the Department.

****

Disclaimer: This article is solely based on the author’s independent study and interpretation of the provisions of the Income Tax Act, 2025. It does not represent or indicate any legislative intent, nor does it claim to reflect the views, policies, or future course of action of the Income Tax Department or any governmental authority. The content is intended purely for academic, informational, and general understanding purposes for readers and should not be construed as professional advice or relied upon for decision-making. Readers are advised to refer to the official Act, notifications, circulars, and consult professional advisors before acting on any information contained herein.