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What is presumptive taxation and how it is beneficial for small businesses, professionals?

Presumptive taxation is a simplified tax regime applicable to small businesses and professionals who have income below a certain threshold. Read ahead to know all about it.

  • 6,026 Views | Updated on: Mar 20, 2024

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 came up with the presumptive taxation scheme under Section 44AD, Section 44ADA, and Section 44AE.

This article talks about the presumptive taxation scheme for businesses and professionals.

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 level of income rather than on their actual profits. This method of taxation is based on the assumption that businesses in certain sectors have a minimum level of income, which can be used as a basis for calculating 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 that are typically used by larger organizations.

Budget 2023 Update - Presumptive Taxation for Business and Profession

The government raised the assumed tax threshold for small firms from ₹2 crore to ₹3 crore and for individuals working as professionals from ₹50 lakh to ₹75 lakh in the budget for 2023.

Simply put, taxpayers who choose presumed taxation are exempt from having to estimate their income by subtracting their expenses from their receipts. Taxpayers just need to figure out a portion of their overall income and pay taxes based on it.

Computation of Presumptive Taxation with example

In order to change the presumptive taxation limits for FY 2023–24 (AY 2024–25), Budget 2023 revised Section 44AD of the income tax act and presumptive taxation for professionals 44ADA as follows

Category

Previous limits

New limits

Sec 44AD: For small businesses

₹2 crores

₹3 crores

Sec 44ADA: For professionals like doctors, lawyers, engineers, etc.

₹50 lakh

₹75 lakh

Let’s say that you run a small retail shop in a town. You don’t keep detailed financial records, so the tax authorities cannot determine your actual income or profits. In this case, they may use a presumptive tax calculation to estimate your tax liability based on certain assumptions.

Assuming that the tax authority estimates that your monthly sales are around ₹3,00,000, they may apply a presumptive tax rate of, say, 5%, which will be ₹15,000. The amount would be considered your tax liability, and you would be required to pay it to the tax authorities.

Presumptive taxation is generally used for small businesses or individuals who do not maintain proper accounting records or whose income is difficult to ascertain. While it may simplify the tax calculation process, it can sometimes result in over or underestimation of tax liability.

What is the Presumptive Taxation Scheme?

Presumptive taxation was first introduced in the year 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.

As per the presumptive taxation scheme, small businesses or professionals are not mandated to maintain books of accounts. Their earnings and profits are presumed in relation to 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:

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

2). 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 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

1 What are the 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

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

2 What are the 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

3What are the 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.
  • In the case of income from business and profession, the income from business can be used to avail Section 44 AD. The income from the profession is taxed as ordinary income under 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.

4 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 the same for the next 5 financial years. However, if the taxpayer does not use the scheme for 5 consecutive years, the individual will not be able to opt for the presumptive taxation scheme for 5 years from the year of opting out..

Presumptive Taxation Scheme Under Section 44ADA

1 What are the eligibility criteria for the presumptive taxation scheme under Section 44 ADA?

The following categories are eligible under Section 44 ADA

1. Resident individuals

2. Hindu Undivided Families (HUFs)

3. Partnership firms, except Limited Liability Partnerships (LLP)

4. In addition to this, the following professions can use the presumptive taxation scheme under Section 44DA

5. Legal

6. Engineering

7. Architecture

8. Interior decoration

9. Medical

10. Accountancy

11. Technical consultancy

12. Film professionals like producers, directors, editors, actors, art directors, singers, music directors, dance directors, lyricists, cameramen, singers, scriptwriters, costume designers, etc.

13. Any other profession as notified by the Central Board of Direct Taxes (CBDT).

2 What are the restrictions in the presumptive taxation scheme 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 have to maintain a book of accounts if the total income is more than 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 as compared to those of Section 44AD. Taxpayers can opt in or out of the presumptive taxation scheme under Section 44ADA at any time they want. The 5-year rule does not apply to taxpayers here.

Presumptive Taxation Scheme Under Section 44 AE

1 What are the eligibility criteria for the presumptive taxation scheme 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

2 What are the 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.

3 What are the 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

1. The tax filing process is simplified

The process of filing an income tax return under the presumptive tax scheme is a lot shorter, simpler, and streamlined. This reduces the time spent on filing a return and offers the taxpayer an easier way to pay taxes.

2. 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 own 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.

3. 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.

4. It removes the hassles of keeping books of accounts

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

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.

There are also other tax-saving strategies that professionals can use to lower their taxes, such as investing in the market, buying insurance, etc. Some of these have been discussed in Kotak Life’s tax and savings guide.

Key takeaways

  • Presumptive taxation is a simplified method of calculating taxes for small businesses and self-employed individuals.
  • Presumptive taxation was first introduced in the year 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 annual gross turnover of the previous as the presumptive income for the current assessment year.
  • The costs involved in filing an income tax return are also considerably lowered.

Frequently Asked Questions

1

What is the due date for filing a return for professional or business individuals?

In India, the due date for filing tax returns for individual professionals and businesses is July 31st of the assessment year for individuals who are not required to have their accounts audited. For businesses and individuals who are required to have their accounts audited, the due date is September 30th of the assessment year.

2

If I have opted for presumptive scheme tax, Will I still need to pay advance tax?

Yes, if you have opted for the presumptive taxation scheme under Section 44AD of the Income Tax Act, 1961, you are still required to pay advance tax.

Under the presumptive taxation scheme, taxpayers can declare their income at a prescribed rate and are not required to maintain detailed books of accounts. However, advance tax is a mechanism through which taxpayers are required to pay taxes on their estimated income for the current financial year in advance, in quarterly installments.

3

Do you need to maintain books of account in case of opting for a presumptive income scheme?

The Presumptive Income Scheme is a scheme under the Income Tax Act that allows small taxpayers to pay taxes at a presumptive rate without having to maintain detailed books of accounts. However, there are certain conditions that need to be fulfilled in order to opt for the Presumptive Income Scheme.

Under the scheme, taxpayers are required to declare their income based on certain presumptive rates, which are fixed by the government. These rates are fixed based on the type of business or profession that the taxpayer is engaged in and are designed to provide a simple and hassle-free way for small taxpayers to pay their taxes.

4

Which professionals are covered under 44ADA?

Section 44ADA of the Income Tax Act, 1961 provides a presumptive taxation scheme for certain professionals. Under this scheme, eligible professionals are allowed to declare their income at a prescribed rate, which is deemed to be their total income for tax purposes. This saves them from the hassle of maintaining detailed accounts and getting their accounts audited.

The professionals who are covered under 44ADA are:

  • Legal professionals
  • Medical professionals
  • Engineers and architects
  • Accountants
  • Technical consultants

5

What is a 5-year rule in 44ADA?

The 5-year rule in section 44ADA of the Income Tax Act, 1961, is a provision that applies to professionals who declare their income under the presumptive taxation scheme. This scheme allows eligible professionals to declare their income at a prescribed rate without having to maintain detailed accounts and records.

According to the 5-year rule, once a professional opts for the presumptive taxation scheme under section 44ADA, they must continue to declare their income under this scheme for the next five consecutive years. If they want to opt out of the scheme before the completion of five years, they will not be allowed to avail of the benefits of the presumptive taxation scheme for the next five years.

6

What is the turnover limit in 44ADA?

The turnover limit in 44ADA refers to the maximum gross receipts or turnover that a person engaged in a specified profession or profession can have in a financial year in order to be eligible to opt for the presumptive taxation scheme under section 44ADA of the Income Tax Act, 1961.

As per the provisions of section 44ADA, individuals who are engaged in certain specified professions such as legal, medical, engineering, architectural, accountancy, technical consultancy, interior decoration, or any other notified profession, and whose gross receipts do not exceed ₹50 lakhs in a financial year, can avail of the presumptive taxation scheme under this section.

- A Consumer Education Initiative series by Kotak Life

Amit Raje
Written By :
Amit Raje

Amit Raje is an experienced marketer who has worked in various Fintechs and leading Financial companies in India. With focused experience in Digital, Amit has pioneered multiple digital commerce in India. Now, close to two decades later, he is the vice president and head of the D2C business department. He masters the skill of strategic management, also being certified in it from IIMA. He has challenged his challenges and contributed his efforts in this journey of digital transformation.

Amit Raje
Reviewed By :
Prasad Pimple

Prasad Pimple has a decade-long experience in the Life insurance sector and as EVP, Kotak Life heads Digital Business. He is responsible for developing user friendly product journeys, creating consumer awareness and helping consumers in identifying need for life insurance solutions. He has 20+ years of experience in creating and building business verticals across Insurance, Telecom and Banking sectors

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