From Section 44AB to Section 63: A Subtle but Significant Audit Trigger Change
The Income-tax Act, 2025 (“New Act”), effective from FY 2026–27, largely retains the framework of presumptive taxation—same thresholds, same deemed profit rates, and the same 5-year lock-in rule.
However, beneath this apparent continuity lies a critical structural shift in tax audit triggers.
A close reading of Section 63 (New Act)—the successor to Section 44AB—reveals a new audit trigger that did not exist under the old regime. This change significantly alters compliance dynamics for small and medium businesses, especially those operating outside presumptive taxation.
2. Position Under the Old Act (Section 44AB read with Section 44AD)
2.1 Audit Framework
Under Section 44AB of the Income-tax Act, 1961, audit was triggered in the following key cases:
- Turnover-based trigger
- Audit required if turnover exceeded ₹1 crore
- Enhanced to ₹10 crore where cash transactions ≤ 5%
- Presumptive scheme deviations (specific cases)
- Lower profits declared under Sections 44AE / 44BB / 44BBB
- Lower profits declared under Section 44ADA (subject to income threshold)
- Section 44AD(4) trigger (5-year lock-in violation)
2.2 The Critical Gap
Notably, no provision required audit merely because profits were below 6%/8% under Section 44AD, unless:
- The assessee had opted into presumptive taxation, and
- Subsequently opted out within 5 years
Implication:
An eligible taxpayer who never opted for Section 44AD could:
- Maintain regular books
- Declare lower actual profits (even below 6%/8%)
- Avoid audit, as long as turnover stayed within limits
Illustration — Old Regime
- Turnover: ₹1.80 crore
- Cash transactions: <5%
- Profit: 3.5%
- Never opted for Section 44AD
Outcome:
No audit required. Filing with books was sufficient.
3. Position Under the New Act (Section 63 read with Section 58)
3.1 Restructured Audit Triggers
Section 63 reorganizes audit conditions into a tabular format. Two triggers are critical:
- Turnover-based trigger (unchanged)
- New standalone trigger (Sl. No. 2)
3.2 The Game-Changer: Lower Profit = Audit
Under Section 63(1), Table Sl. No. 2:
If a taxpayer carries on a business covered under Section 58(2) (i.e., presumptive business category) and declares profits lower than deemed rates, audit becomes mandatory.
What Makes This Different?
This provision:
- Does NOT require prior opting into presumptive taxation
- Is NOT linked to the 5-year lock-in rule
- Applies purely based on:
- Nature of business
- Level of profit declared
In short: audit is now triggered by profit level, not taxpayer choice.
Illustration — New Regime
Same facts as before:
- Turnover: ₹1.80 crore
- Profit: 3.5%
- Never opted for presumptive taxation
Outcome under New Act:
Audit is mandatory, since profit is below 6%/8%.
4. Two Independent Audit Triggers Under the New Act
| Trigger Type | Provision | Nature |
|---|---|---|
| Turnover-based | Section 63(1) Sl. No. 1 | Unchanged |
| Lock-in violation | Section 58(7)/(8) | Same as old law |
| Lower profit declaration (NEW) | Section 63(1) Sl. No. 2 | Completely new trigger |
5. Practical Impact — End of a Popular Strategy
Old Strategy (Now Invalid):
Taxpayers with low margins could:
- Avoid presumptive taxation
- Maintain books
- Declare actual profits (<6%/8%)
- Avoid audit
New Reality:
This approach is no longer viable.
Illustration — Practical Impact
- Turnover: ₹2.50 crore
- Cash transactions: <5%
- Profit: 2%
Under Old Act: No audit
Under New Act: Audit mandatory.
6. Strategic Choice for Taxpayers
From FY 2026–27 onwards, taxpayers must choose:
Option A — Presumptive Route
- Declare ≥6%/8% profit
- No audit
- Higher tax outflow
Option B — Actual Profit Route
- Declare true profit (<6%/8%)
- Maintain books
- Audit compulsory
7. Decision Matrix
| Scenario | Audit Requirement |
|---|---|
| Profit ≥ 6%/8% | No |
| Profit < 6%/8% (even without opting presumptive) | Yes (New Rule) |
| Opt-out within 5 years | Yes |
| Turnover exceeds limits | Yes |
8. Conclusion
The introduction of Section 63(1), Sl. No. 2 marks a silent but far-reaching shift in audit provisions.
Under the old regime, audit exposure depended largely on taxpayer choices.
Under the new regime, it depends on profitability benchmarks defined by law.
This effectively removes the flexibility that many small businesses relied on.
Key takeaway:
If your business falls within the presumptive framework, declaring lower profits will now automatically pull you into audit—whether you opted for presumptive taxation or not.
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