Opting in, opting out and the 5-year lock
How presumptive taxation is chosen and left, and the one-way door that 44AD businesses face
You opt into presumptive taxation simply by declaring the deemed income (6 or 8% under 44AD, 50% under 44ADA, or the per-vehicle figure under 44AE) in your return, there is no separate form. Opting out happens when you declare profit below the deemed rate. For a 44AD business this triggers a five-year lock-out under Section 44AD(4): you cannot use 44AD again for the next five tax years and must keep books and get an audit in those years if your income is taxable. Crucially, this lock-out does not apply to 44ADA professionals, who can move in and out freely year to year.
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Guidance, not advice. We explain the rules, we don't assess your situation. Always seek financial or tax advice from your accountant, or contact Income Tax Department. Read our editorial scope →
Opting in is automatic
There is no application to file for presumptive taxation. You opt in for a year by simply computing your income on the presumptive basis and filing ITR-4. If you are eligible (a resident business within the turnover limit for 44AD, a specified profession within the receipts limit for 44ADA, or a goods-carriage operator for 44AE) and you declare at least the deemed income, you are in the scheme for that year.
What counts as opting out, and the 44AD lock
You opt out of 44AD by declaring profit lower than the deemed 6 or 8% in a year after having used it. Section 44AD(4) then bars you from using 44AD for the next five tax years, and in each of those years you must keep books and get a tax audit if your total income exceeds the basic exemption. This is why leaving 44AD is a five-year decision, not a one-year one. Simply having a genuinely low-profit or loss year, and wanting to declare it honestly, can trigger the lock, so plan before you switch.
warningThe 44AD(4) lock-out is the single most misunderstood presumptive rule. Declaring below the deemed profit once locks you out of 44AD for five years and forces books plus audit. Model the five-year cost before opting out.
Professionals (44ADA) are not locked
The five-year lock is specific to 44AD businesses. A professional on Section 44ADA has no equivalent lock-out: you can declare actual (lower) profit with books in a high-expense or loss year, then return to the 50% scheme the next year, without penalty. This makes 44ADA far more flexible than 44AD, a useful planning point for a professional whose expenses vary year to year. 44AE operators, like 44AD businesses, face books and audit if they declare below the deemed figure.
tipBecause 44ADA has no lock, a professional can treat each year independently: deemed 50% in normal years, actual books in a heavy-expense year, then back to 50%. A 44AD business cannot do this without the five-year consequence.
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Source / notes
- Income-tax Act 1961 s.44AD(4) (five-year lock-out) (consolidated into the Income-tax Act 2025 s.58)
- Income-tax Act 1961 s.44AD(5) + s.44AB (books and audit on opt-out)
- Income-tax Act 1961 s.44ADA (no lock-out for professionals)
Frequently asked questions
Do I need to file a form to use presumptive taxation?+
No. You opt in simply by declaring the deemed income (6 or 8% for 44AD, 50% for 44ADA, the per-vehicle figure for 44AE) and filing ITR-4. There is no separate election. You are in the scheme for any year in which you are eligible and declare at least the deemed income.
What is the five-year lock-out?+
If you use Section 44AD and then declare profit below the deemed 6 or 8% (opting out), Section 44AD(4) bars you from using 44AD for the next five tax years, and you must keep books and get an audit in those years if your income is taxable. So opting out of 44AD is effectively a five-year commitment to regular books.
Does the lock-out apply to professionals on 44ADA?+
No. The 44AD(4) five-year lock-out applies only to 44AD businesses. A professional on 44ADA can declare actual lower profit with books in one year and return to the 50% scheme the next, without any lock. This flexibility is a key difference between the business and professional schemes.
I had a loss year. Will declaring it lock me out of 44AD?+
If you were on 44AD and now declare profit below the deemed rate (including a loss), yes, it triggers the Section 44AD(4) lock-out and books-plus-audit for that and the following years. Before declaring below the deemed profit, model whether the honest lower figure is worth the five-year consequence, and take advice for your specific facts.
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