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Ref. No. KLI/22-23/E-BB/492
Ref. No. KLI/22-23/E-BB/490
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.
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.
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.
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.
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
Sec 44AD: For small businesses
Sec 44ADA: For professionals like doctors, lawyers, engineers, etc.
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.
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.
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.
1 What are the eligibility criteria for the presumptive taxation scheme under Section 44 AD?
The following categories are eligible under Section 44 AD
Taxpayers also need to adhere to the following
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
3What are the features of the presumptive taxation scheme under Section 44 AD?
Here are the features of this scheme
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..
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
8. Interior decoration
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
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.
1 What are the eligibility criteria for the presumptive taxation scheme under Section 44AE?
The following categories are eligible under Section 44 AE
In addition to this, the following professionals can avail of the presumptive taxation scheme
2 What are the features of the presumptive taxation scheme under Section 44 AE?
Here are some things to note about Section 11AE
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.
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.
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.
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.
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.
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:
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.
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.
Ref. No. KLI/22-23/E-BB/999
Ref. No. KLI/22-23/E-BB/490