presumptive-taxation-for-business-and-profession

Do you know what is presumptive income? Presumptive Income is a concept under the Income Tax Act of 1961, in India, which simplifies the process of computing income for certain small taxpayers. Instead of maintaining detailed books of accounts and undergoing complex audits, eligible taxpayers can declare income at a prescribed percentage of their total turnover or gross receipts.

The Presumptive Income Tax Act of 1961 also states that an individual in business or profession needs to maintain regular books of account and have the accounts audited. This can be a time-consuming and costly affair. Hence, to offer a way out, the Government of India developed the presumptive taxation scheme under Section 44AD, Section 44ADA, and Section 44AE.

What is Presumptive Taxation?

Presumptive taxation is a simplified method of calculating taxes for small businesses and self-employed individuals. This system is designed to ease the tax burden on small businesses by reducing compliance costs and simplifying the tax process.

Under presumptive taxation, businesses are taxed on a presumed income level rather than their actual profits. This method of taxation assumes that businesses in certain sectors have a minimum income, which can be used to calculate taxes.

Presumptive taxation is typically used for small businesses and self-employed individuals who have limited resources and may not have the means to maintain detailed financial records. In many cases, these individuals and businesses may not have access to the professional accounting and tax services typically used by larger organizations.

Budget 2024 Update - Presumptive Taxation for Business and Profession

There were no significant changes to the presumptive taxation scheme under Sections 44AD and 44ADA in the Union Budget 2024. The key features introduced in the previous budget, which are still applicable, include:

• Increased Limits: The turnover limit for presumptive taxation under Section 44AD was increased from ₹2 crore to ₹3 crore. For professionals under Section 44ADA, the limit was raised from ₹50 lakh to ₹75 lakh.

• Condition for Increased Limits: Both the increased limits are subject to the condition that at least 95% of the total receipts are through digital modes.

Key Points to Remember for people availing benefits of presumptive taxation scheme:

• Section 44AD: For businesses with a turnover up to ₹3 crore (subject to the 95% digital receipts condition), income is presumed at 8% of gross receipts for non-digital transactions and 6% for digital transactions.

• Section 44ADA: For professionals with gross receipts up to ₹75 lakh (subject to the 95% digital receipts condition), 50% of gross receipts is considered as income.

• No Detailed Books of Accounts: Both schemes allow taxpayers to avoid maintaining detailed books of accounts.

Calculation of 44AD Presumptive Income Under Section

Under Section 44AD, eligible small businesses can declare income as a percentage of their total turnover or gross receipts. Below is the detailed method for calculating presumptive income:

1. Determine Total Turnover/Gross Receipts

• Calculate the total turnover or gross receipts of the business for the financial year.

1. Apply Presumptive Income Rate

• 8% of the turnover or gross receipts is considered as income.
• 6% of the turnover or gross receipts for digital transactions (receipts through bank account, electronic clearing system, debit card, credit card, etc.).

1. Combine Both Types of Transactions

• Calculate the presumptive income separately for cash and digital transactions and then sum them up to get the total presumptive income.

Let’s consider a business with the following details for the financial year:

• Total Turnover: ₹1,50,00,000
• Receipts through digital transactions: ₹50,00,000
• Receipts through cash transactions: ₹1,00,00,000

Let’s calculate presumptive income:

If Turnover Breakdown:

• Digital Transactions: ₹50,00,000
• Cash Transactions: ₹1,00,00,000

Presumptive Income Calculation:

Digital Transactions,

Presumptive Income: ₹50,00,000 * 6% = ₹3,00,000

Cash Transactions,

Presumptive Income: ₹1,00,00,000 * 8% = ₹8,00,000

Total Presumptive Income,

Total Presumptive Income = ₹3,00,000 (Digital) + ₹8,00,000 (Cash) = ₹11,00,000

What is the Presumptive Taxation Scheme?

Presumptive taxation was introduced in 1995-96 under Section 44AD of the Income Tax Act of 1961. It was later amended, and a new presumptive taxation scheme was introduced in FY 2016-17 under Section 44ADA.

Under the presumptive taxation scheme, small businesses or professionals are not mandated to maintain books of accounts. Their earnings and profits are presumed to be a certain percentage of their total sales for the year, and their taxes are calculated accordingly.

What are the Rates for Presumptive Taxation?

Rates of taxable income consideration for business taxpayers vary on the nature of the receipt:

• Cash receipts are subject to consideration of 8% of the entire amount received.

• The rate for digital (non-cash) payments would be 6%.

For instance, your taxable income under presumptive tax laws will be ₹6.6 lakhs (₹2.4 + ₹4.2 lakhs) if your company had a total revenue of ₹1 crore the previous year and cash receipts up to ₹30 lakhs.

A professional who chooses presumptive taxation can calculate their tax obligation using 50% of their total income.

Presumptive Taxation Scheme Under Section 44AD

Section 44AD is a simplified tax regime for small businesses. Under this scheme, taxpayers can presume their income as a certain percentage of their gross receipts without maintaining detailed books of accounts.

Eligibility Criteria for the Presumptive Taxation Scheme Under Section 44 AD

The following categories are eligible under Section 44 AD

• Resident individuals
• Hindu Undivided Families (HUFs)
• Partnership firms, except Limited Liability Partnerships (LLP)

Taxpayers also need to adhere to the following

• Individuals’ and firms’ annual gross turnover should not have been more than ₹2 crores in the previous year.
• During the assessment year, individuals or firms cannot claim a tax deduction under Sections 10A, 10B, 10AA, and 10BA.
• Individuals and firms cannot claim tax deductions under Sections 80RRB and 80HH.

Restrictions in the Presumptive Taxation Scheme Under Section 44AD

The following taxpayers cannot avail of the presumptive taxation scheme under Section 44 AD:

• Individuals earning from a profession under Section 44 AA (1)
• Businesses or individuals hiring and plying goods carriages,
• Individuals running an agency
• Firms or individuals running a brokerage or commission-based business

Features of the Presumptive Taxation Scheme Under Section 44 AD

Here are the features of this scheme:

• Taxpayers can consider 8% of the annual gross turnover of the previous as the presumptive income under section 44AD for the current assessment year.
• The annual turnover should be less than ₹2 crores.
• Taxpayers can use the presumptive income as their net income for the current year.
• Taxpayers who opt for Section 44 AD must use the ITR Form 4 to file their income tax returns.
• Taxpayers cannot claim a deduction under Section 38 or 30 if they choose Section 44 AD.
• In the case of multiple businesses, the tax is calculated on the total turnover of all the businesses.
• Income from business and profession can be used to avail Section 44 AD. Income from the profession is taxed as ordinary income under the prevailing income tax slabs.
• Taxpayers can claim tax benefits under Chapter VI-1 along with the benefits of the presumptive tax scheme under Section 44 AD.

Can you Opt In and Out of Section 44 AD?

As per the rules of Section 44AD, if a taxpayer chooses to opt for the presumptive taxation scheme for a financial year, the individual has to continue using it for the next five financial years. However, if the taxpayer does not use the scheme for five consecutive years, the individual cannot opt for the presumptive taxation scheme for five years from the year of opting out.

Presumptive Taxation Scheme Under Section 44ADA

The Presumptive Taxation Scheme under Section 44ADA is a beneficial provision for small professionals, offering ease of compliance and simplified tax calculations. Let us look at the eligibility, restrictions, and who can opt in or out of the scheme.

Eligibility Criteria for the Presumptive Taxation Under Section 44 ADA

The following categories are eligible under Section 44 ADA:

• Resident individuals
• Hindu Undivided Families (HUFs)
• Partnership firms, except Limited Liability Partnerships (LLP)
• In addition to this, the following professions can use the presumptive taxation scheme under Section 44DA
• Legal
• Engineering
• Architecture
• Interior decoration
• Medical
• Accountancy
• Technical consultancy
• Film professionals include producers, directors, editors, actors, art directors, singers, music directors, dance directors, lyricists, cameramen, singers, scriptwriters, and costume designers.
• Any other profession as notified by the Central Board of Direct Taxes (CBDT).

Restrictions in the Presumptive Taxation Under Section 44 ADA

Here are some restrictions of Section 44ADA:

• The total gross earnings from a profession should not be more than ₹50 lakhs in a financial year.
• Taxpayers must maintain a book of accounts if the income from a profession is less than 50% of the gross receipts.
• Taxpayers must maintain a book of accounts if the total income exceeds the basic exemption limit.
• Taxpayers must pay advance tax on or before March 15 of the previous year.

Failure to do so will result in a penalty to pay interest as per Section 234C.

Can you Opt In and Out of Section 44ADA?

The process and rules of opting in and out of the presumptive taxation scheme under Section 44 ADA are quite relaxed compared to those of Section 44AD. Taxpayers can opt in or out of the presumptive taxation scheme under Section 44ADA. The 5-year rule does not apply to taxpayers here.

Presumptive Taxation Scheme Under Section 44 AE

Section 44AE is a presumptive taxation scheme designed for individuals or entities engaged in plying, hiring, or leasing goods carriages.

Eligibility Criteria Under Section 44AE

The following categories are eligible under Section 44 AE

• Resident individuals
• Hindu Undivided Families (HUFs)
• Partnership firms, except Limited Liability Partnerships (LLP)

In addition to this, the following professionals can avail of the presumptive taxation scheme

• Taxpayers in the business of plying, hiring, or leasing goods carriages
• Taxpayers in ownership of 10 or fewer goods vehicles at any time during the year

Features of the Presumptive Taxation Scheme Under Section 44 AE

Here are some things to note about Section 11AE

• A person cannot own more than 10 goods vehicles at any time during the year.
• In the case of heavy goods vehicles (more than a gross weight of 12 MT), the income is calculated at ₹1,000 per ton of gross vehicle weight for the time during which the taxpayer owns the vehicle.
• In the case of other vehicles, income is calculated at ₹7,500 for the time during which the taxpayer owns the vehicle.

Benefits of Filing an Income Tax Return Under the Presumptive Taxation Scheme

Here are some benefits of the presumptive taxation scheme that can help taxpayers while filing their income tax returns

The tax filing process is simplified

Filing an income tax return under the presumptive tax scheme is much shorter, simpler, and streamlined. This reduces the time spent filing a return and offers taxpayers an easier way to pay taxes.

The cost of tax filing is reduced

The costs involved in filing an income tax return are also considerably lowered. With a simple process, taxpayers can file their returns. There is no need to hire a professional to do the same thing. This saves the money that would otherwise be spent on chartered accountants and tax consultants.

It allows taxpayers to lower their tax liability

The tax liability of a taxpayer opting for the presumptive tax scheme is lower than those who do not. With this scheme, small business owners and professionals can declare 50% of their income as their profit for the year. The remaining funds can be shown as expenses. This considerably lowers their tax liability.

It removes the hassles of keeping books of accounts

The primary reason for the scheme was to eliminate the need to keep books of accounts. Businesses and professionals opting for the scheme can save time and money by not having to maintain books of accounts.

Benefits of Presumptive Taxation

Presumptive taxation offers several advantages for eligible taxpayers. Let us take a look at various advantages of presumptive taxation for professionals:

Simplified Compliance

The most significant benefit is the reduction in paperwork. Taxpayers are exempt from maintaining detailed books of accounts and conducting regular audits.

Time and Cost Savings

By eliminating the need for complex accounting and tax calculations, businesses and professionals can save time and money.

Promotes Digital Transactions

For businesses under Section 44AD, a lower presumptive income rate (6% instead of 8%) for digital transactions incentivizes cashless operations.

Predictability

Tax liabilities can be estimated more accurately since income is calculated based on a fixed percentage of gross receipts.

Focus on Core Business

With less time spent on tax compliance, businesses can concentrate on their core operations.

Lower Tax Liability

In some cases, presumptive taxation can result in lower tax liabilities compared to the regular tax regime, especially for businesses with high expenses.

No Disallowance of Expenses

Since all eligible expenses are deemed to be included in the presumptive income, there are no disallowances or adjustments for actual expenses.

To Sum it Up

The presumptive taxation scheme has brought many benefits for small businesses and professionals who otherwise had trouble maintaining books of accounts and consolidating their income tax returns. With a reduction in overall costs, small businesses can use the money for their professional growth.

Other tax-saving strategies that professionals can use to lower their taxes include investing in the market, buying insurance, etc.

Key Takeaways

• Presumptive taxation is a simplified method of calculating taxes for small businesses and self-employed individuals.
• Presumptive taxation was introduced in 1995-96 under Section 44AD of the Income Tax Act of 1961.
• Rates of taxable income consideration for business taxpayers vary on the nature of the receipt.
• Taxpayers can consider 8% of the previous assessment year’s annual gross turnover as the presumptive income for the current assessment year.
• The costs involved in filing an income tax return are also considerably lowered.

FAQs on Presumptive Taxation in India