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.
Under Section 44AB of the Income-tax Act, 1961, audit was triggered in the following key cases:
Notably, no provision required audit merely because profits were below 6%/8% under Section 44AD, unless:
Implication:
An eligible taxpayer who never opted for Section 44AD could:
Outcome:
No audit required. Filing with books was sufficient.
Section 63 reorganizes audit conditions into a tabular format. Two triggers are critical:
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.
This provision:
In short: audit is now triggered by profit level, not taxpayer choice.
Same facts as before:
Outcome under New Act:
Audit is mandatory, since profit is below 6%/8%.
| 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 |
Old Strategy (Now Invalid):
Taxpayers with low margins could:
New Reality:
This approach is no longer viable.
Under Old Act: No audit
Under New Act: Audit mandatory.
From FY 2026–27 onwards, taxpayers must choose:
Option A — Presumptive Route
Option B — Actual Profit Route
| 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 |
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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