Presumptive Taxation for Business and Profession

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.

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

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.

Frequently Asked Questions