Presumptive Taxation for Business and Profession

What is a Presumptive Taxation Scheme?

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 meaning is usually 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 usually used by larger organizations.

Who Will Be Most Affected by the New Presumptive Taxation Rules in India?

The recent amendments to the presumptive taxation scheme represent a significant policy shift that will directly influence the tax strategies of several key taxpayer groups. Here is a breakdown of who needs to pay closest attention:

Small Businesses and MSMEs

The primary beneficiaries are growing small and micro-enterprises. With the turnover limit for presumptive taxation 44AD increased to ₹3 crore, more businesses can now qualify. This expansion offers a valuable opportunity to simplify compliance, reduce accounting overhead, and focus on business growth rather than extensive tax calculations.

Independent Professionals and Freelancers

Professionals governed by Section 44ADA, including doctors, lawyers, consultants, and digital freelancers, face a new threshold. The gross receipt limit has been raised to ₹75 lakh. Professionals must now carefully assess their annual receipts to determine if they still fall within this simplified scheme or if they need to transition back to maintaining detailed books of accounts and undergoing a formal audit.

Businesses with High Cash Transactions

The new rules create a clear disadvantage for businesses that rely heavily on cash. Since the turnover limits are tied to digital payments, cash-intensive firms are ineligible for these higher thresholds. This policy acts as a strong incentive to digitize payment systems, as failing to do so leaves businesses with lower presumptive limits and a comparatively higher compliance burden.

Objectives of Presumptive Taxation

Presumptive taxation is a strategic policy tool with well-defined objectives aimed at benefiting both the taxpayer and the tax administration system. It is designed to achieve the following:

Streamline the Compliance Process

The primary goal is to reduce the compliance burden on small businesses and independent professionals. The scheme eliminates the need for maintaining extensive books of account and undergoing mandatory audits, which are often complex and costly. By making tax filing straightforward and accessible, it saves taxpayers significant time and financial resources.

Drive Voluntary Tax Adherence

When tax laws are easy to understand and follow, the likelihood of voluntary adherence increases substantially. The scheme is engineered to bring more small-scale enterprises and professionals into the formal tax net by making the process less intimidating and more manageable.

Enhance Administrative Efficiency

From the government’s perspective, this scheme is a key instrument for optimizing administrative resources. By simplifying tax assessment for millions of small taxpayers, the Income Tax Department can redirect its scrutiny and verification efforts toward more complex and high-value cases, ensuring a more efficient and effective tax system.

Promote Economic Awareness

An important secondary objective is to encourage small businesses to move towards a more organized economic structure. By incentivizing digital transactions to qualify for higher turnover limits, the scheme directs businesses toward formal banking channels. This improves their financial records, builds a credible transaction history, and can ultimately enhance their access to credit and other financial products.

Section I: Businesses

The presumptive taxation is available to specific types of resident taxpayers:

• Individuals
• Hindu Undivided Families (HUFs)
• Partnership Firms

Presumptive Taxation

A business is eligible to opt for this scheme if its total turnover or gross receipts in the financial year do not exceed the following limits:

Under Section 44AD, income is computed at a prescribed percentage of the total turnover. Taxpayers must declare a profit of:

• 8% of the turnover earned through non-digital means.
• 6% of the turnover earned through digital means

Furthermore, certain businesses are explicitly ineligible to adopt the presumptive scheme under Section 44AD. These include:

• Businesses involved in plying, hiring, or leasing goods carriages
• Businesses earning income from commission or brokerage.
• Any agency business.
• Professionals whose income is covered under Section 44ADA.

Computation of Income under Presumptive Taxation

Now, let us consider an example of Mohit Traders, a business that does not maintain detailed books of account, has opted for the presumptive scheme for FY 2025-26.

• Total Gross Receipts: ₹2.5 Crore
• Receipts via Digital Transactions: ₹1.5 Crore
• Receipts via Non-Digital (Cash) Transactions: ₹1 Crore

Presumptive Income Calculation:

1. Income from Digital Receipts: ₹1,50,00,000 x 6% = ₹9,00,000
2. Income from Non-Digital Receipts: ₹1,00,00,000 x 8% = ₹8,00,000

Total Taxable Income:
₹9,00,000 + ₹8,00,000 = ₹17,00,000

Section II: Professionals

Similar to the scheme for businesses, Section 44ADA of the Income Tax Act provides a simplified taxation method specifically for professionals. It allows them to bypass complex record-keeping and declare income at a presumed rate.

Individuals Carrying On the Following Specified Profession Can Opt for 44ADA

Section 44ADA is exclusively available to resident individuals or partnership firms (excluding LLPs) engaged in the following specified professions:

• Legal
• Medical
• Engineering or Architectural
• Accountancy (Chartered Accountants)
• Technical Consultancy
• Interior Decoration
• Any other profession as notified by the Central Board of Direct Taxes (CBDT)

Presumptive Taxation

Section 44ADA of the Income Tax Act outlines the rules for professionals who want to use presumptive taxation. This option is available to any business as long as its gross earnings for the year do not go over the specified financial limit.

A professional can opt for this scheme if their total gross receipts for the financial year do not exceed the following new limits:

Let us analyze the impact of this scheme with an example. Dr. Payal, a practicing medical professional, earned gross receipts of ₹30 lakh during the financial year 2023-24. Her actual operational expenses for the year amounted to ₹3 lakh.

We will compare her tax liability under both methods, assuming she opts for the New Tax Regime.

By opting for the presumptive scheme under Section 44ADA, Dr. Payal achieves a tax saving of ₹3,60,000 (₹5,00,000 - ₹1,40,000). This demonstrates that for professionals with actual expenses significantly lower than 50% of their receipts, the presumptive scheme is a powerful strategy for tax optimization.

Freelancers Income

If your freelance services fall under the professions specified in Section 44ADA, such as legal, engineering, medical, accountancy, technical consultancy, interior decoration, etc., you are treated as a professional. You can opt for the presumptive scheme under Section 44ADA, provided your gross receipts are within the prescribed limits.

If your freelance work does not fall into the list of specified professions, your work is considered a business. You can then opt for the presumptive scheme under Section 44AD for businesses, as long as your total turnover is within the eligible limits. Your income would be calculated at 6% or 8% of your turnover, depending on the mode of payment receipt.

Eligibility for Presumptive Taxation

To benefit from presumptive taxation, a taxpayer must meet specific eligibility criteria defined by their business type or profession. The scheme is primarily divided into three key sections, each with its own set of rules and turnover limits.

Businesses under Section 44AD

This section is designed for resident individuals, Hindu Undivided Families (HUFs), and partnership firms (excluding LLPs). The key criterion is annual turnover. To be eligible, a business must have a total turnover of up to ₹3 crore if at least 95% of receipts are from digital modes, or up to ₹2 crore otherwise.

Specified Professionals under Section 44ADA

This is for resident professionals in fields such as law, medicine, engineering, architecture, accountancy, and technical consultancy. Eligibility here is based on gross annual receipts, which must not exceed ₹75 lakh (with the 95% digital receipt condition) or ₹50 lakh in other cases. Under this section, a flat 50% of gross receipts is considered taxable income.

Goods Carriage Businesses under Section 44AE

This section is for taxpayers engaged in the business of plying, hiring, or leasing goods vehicles. The main condition is that the taxpayer must not own more than ten goods vehicles at any time during the financial year. Income is not based on turnover but is calculated at a fixed rate per vehicle per month, making it highly convenient for small transport operators

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 income tax presumptive taxation has brought many benefits for small businesses and professionals who otherwise had trouble maintaining books of accounts and filing an income tax return. With a reduction in overall costs, small businesses can use the money for their professional growth. Other tax-saving strategies that professionals can use apart from understanding what is presumptive taxation to lower their taxes include investing in the market, buying insurance, etc.

FAQs on Presumptive Taxation in India