Presumptive Taxation for Business and Profession
Taxation

Presumptive Taxation for Business and Profession

6 Mins read

Navigating the tax system in India can be challenging, especially for small business owners and professionals. With so many rules, paperwork, and regulations, it becomes difficult to stay compliant with all the laws. To make compliance easier, the government introduced the Presumptive Taxation Scheme in the Income Tax Act of 1961 to simplify the tax process for specific businesses and professionals. Instead of going through the complicated task of maintaining books of accounts and detailed records, you can now calculate your tax liability based on a fixed percentage of your income. The Presumptive Taxation Scheme helps reduce the burden of paperwork involved in tax compliance. It saves time and effort, and it is an excellent option for small businesses that don’t have complex financials.

In this blog, we shall understand the Presumptive Taxation Scheme, how it works, and the benefits it offers to business owners and professionals in India. By the end, you will understand how to take advantage of this simplified tax system and make income tax filing much easier.

What is Presumptive Taxation?

Presumptive Taxation is a method of taxation in which a taxpayer’s income is presumed to be a certain percentage of their gross receipts or turnover. The main objective of the system is to eliminate the need to maintain complex books of accounts and it reduces the compliance costs and simplifies the tax process, thereby reducing the tax burden on small businesses. Instead of calculating income through detailed accounts, the taxpayer’s income is estimated on the basis of the standard formula or percentage.

Presumptive Taxation in India is covered under Sections 44AD, 44ADA, and 44AE of the Income Tax Act, 1961:

  1. Section 44AD – For Small Businesses

This section applies to businesses other than professions. It allows small taxpayers, like freelancers, not to maintain books of accounts when filing tax rates. It is applicable to those businesses whose gross receipts or turnover do not exceed Rs. 2 crores. Under this section, 8% of the total turnover or gross receipts (or 6% for digital transactions) is presumed to be the taxpayer’s income. This is considered the taxable income for the business, and no further detailed calculations are required. It is mandatory for the business opting for this scheme to continue for at least five consecutive years, and the taxpayers who are filing the Income Tax Return cannot claim any other expense or depreciation under the Income Tax Act of 1961. Still, they are allowed to claim payments to the partners and interest.

  1. Section 44ADA – For Professionals

This section applies to self-employed professionals such as doctors, lawyers, architects, accountants, and others. If the professional’s gross receipts do not exceed Rs. 50 lakhs in a financial year, 50% of the gross receipts are deemed to be income. Professionals do not need to maintain books of accounts, and they can opt for this scheme to avoid the hassle of maintaining detailed books of accounts.

  1. Section 44AE – For Enterprises and Owners of Goods Carriages

This section applies to small enterprises engaged in hiring, plying, and leasing vehicles for goods carriages and do not carry more than 10 vehicles during the year. The income is computed based on a fixed amount for each vehicle owned, with the assumption that income from the car is fixed irrespective of the actual income earned.

Benefits of Presumptive Taxation

The Presumptive Taxation scheme offers several advantages, particularly to small businesses and professionals, and some of the benefits are:

  1. Easy Filing: The Presumed Taxation scheme under Section 44AD allows small businesses to file taxes without maintaining detailed books of accounts. Businesses can declare a specific percentage of their turnover as income rather than keeping track of every expense, income, or asset.
  2. Reduced Tax Liabilities: Businesses are expected to make a set percentage of their turnover as profit under this arrangement, often 8%. Businesses that might have lower earnings than the projected amount will benefit from this. For instance, under the usual tax system, a company with a turnover of Rs. 75 lakhs would have to report its actual income and expenses, which could result in a more outstanding tax obligation. However, the income is assumed at a flat rate (in this case, 8% of Rs. 75 lakhs) under the presumptive scheme.
  3. No Audit Requirement: Taxpayers and businesses choosing presumptive taxation under Section 44AD are exempted from tax audits, which are mandatory for businesses whose annual turnover is more than Rs. 1 crore. The exemption saves taxpayers and businesses significant time and money.
  4. Faster Filing: Since the income is presumed (based on turnover), businesses don’t need to calculate the exact profits or losses. The tax return is simpler, and tax authorities can process it more swiftly, reducing the time spent on assessments and disputes.
  5. Digital Payment Incentive: Another advantage of Section 44AD is that it lowers the anticipated revenue rate from 8% to 6% for taxpayers and businesses that accept payments through digital channels like bank transfers, debit/credit cards, or online wallets. By reducing the presumed income rate from 8% to 6%, the Indian government encourages more digital payments.

Eligibility Criteria for Presumptive Taxation as per 2023 Union Budget

Section Turnover Eligibility Entities/Professionals Eligible Entities/Professionals not eligible
44AD Businesses whose gross turnover is below Rs. 3 crores. Hindu Undivided Family

Partnerships Firms

Limited Liability Partnerships (LLPS)

Legal, Medical, Engineering, Accounting Services Professionals

 

44ADA Earn less than Rs. 75 lakhs a year from the profession. Legal, Medical, Engineering, Architecture, Accountancy, Technical Consultant, Interior Decorator, movie director, actors, editors, and music directors.

Authorised Representative of the professionals as mentioned above.

Employees and Accountants, Agents, etc.
44AE Total taxable income is calculated at the rate of Rs. 7,500/- per vehicle per month. Individuals, Hindu Undivided Family (HUF), partnership firms, and private companies. Companies and businesses engaged in operating, hiring, or leasing passengers carrying vehicles.

It is pertinent to note that the taxpayer should not have received income from other sources, like interest, capital gains, or rental income. Businesses must derive their income from a legitimate business or occupation.

How to Calculate Income Under Presumptive Taxation?

Income is calculated under each section of presumptive taxation as:

1. Section 44AD (For Small Businesses)

If a business has a total turnover (sales or income) of up to Rs. 1 crore, the government assumes that 8% of the turnover is your profit. So, if your turnover is Rs. 1 crore, the presumed income would be Rs. 8 lakhs (8% of Rs. 1 crore).

Digital Payments Benefit: If the business receives payments digitally (e.g., through bank transfers or digital wallets), the presumed profit rate drops to 6%. So, for a Rs. 1 crore turnover, the presumed income would then be Rs. 6 lakhs (6% of Rs. 1 crore).

2. Section 44ADA (For Professionals)

If you’re a professional (like a doctor, lawyer, consultant, etc.) with gross receipts of up to Rs. 30 lakhs, the government assumes that 50% of your gross receipts are your income.

For example, if your total income for the year is Rs. 30 lakhs, your presumed income will be Rs. 15 lakhs (50% of Rs. 30 lakh). You can declare half of your total income as your profit, and if you file an Income Tax Return showing Rs. 15 lakhs profit, you are not required to maintain any books of accounts.

3. Section 44AE (For Vehicle Owners)

If you own commercial vehicles (like trucks or taxis) and use them for business, you can calculate your presumed income based on the number of cars you have.

For example, if you own 5 vehicles, the presumed income per vehicle is Rs. 7,500 per month.

So, for five vehicles:
Rs. 7,500 per month x 12 months x 5 vehicles = Rs. 4.5 lakh annually.

Checklist to Follow

While the presumptive taxation scheme is designed to simplify tax filing, businesses and professionals should be aware of common pitfalls:

  • Carefully check the eligibility criteria carefully
  • Correctly calculate digital transactions
  • Check whether you are eligible to claim benefits under other provisions of the Income Tax Act of 1961. Section 44AD of the Income Tax Act, 1961 clearly prohibits availing exemption under other provisions of the Income Tax Act, 1961.
  • Hire a professional who can help you with tax calculation and Income Tax Return filing.

Conclusion

In conclusion, small firms and professionals benefit significantly from the Presumptive Taxation scheme, which makes tax compliance easier to handle. It lessens the administrative load by providing a simple method for figuring out income and filing taxes, freeing up experts and business owners to concentrate on expanding their operations. The scheme is designed specifically for a particular kind of taxpayer and businesses.  Whether you’re a small business, a self-employed professional, or even an owner of commercial vehicles—this scheme makes tax compliance much more manageable. The scheme also promotes the use of digital payments, rewarding businesses for going digital with a lower presumed income rate.

Frequently Asked Questions

1. What is the Presumptive Taxation scheme?

It is a simplified taxation method in which a taxpayer’s income is presumed to be a fixed percentage of their turnover or gross receipts.

2. Who is eligible for Presumptive Taxation under Section 44AD?

As per the 2023 Union Budget, small businesses with turnover up to Rs. 3 crores are eligible.

3. Can a professional opt for the Presumptive Taxation scheme?

Yes, professionals with gross receipts up to Rs. 50 lakh (Rs. 75 lakhs as per 2023 Union Budget) can opt for the scheme under Section 44ADA.

4. Do I need to maintain books of accounts if I opt for Presumptive Taxation?

No, if you opt for the scheme, you don’t need to maintain detailed books of accounts.

5. Is the Presumptive Taxation scheme available for all types of businesses?

No, it is not available for companies or LLPs. It is mainly for small businesses and professionals.

6. What is the presumptive income percentage for businesses under Section 44AD?

It is 8% of the turnover or gross receipts, or 6% if payments are made digitally.

7. What is the presumptive income percentage for professionals under Section 44ADA?

It is 50% of the gross receipts or turnover.

8. Can I claim deductions under the Presumptive Taxation scheme?

No, deductions under sections like 80C or 80D are not available under this scheme.

9. Is a tax audit required under the Presumptive Taxation scheme?

No, businesses opting for presumptive taxation under Section 44AD are exempt from tax audits.

10. Can I opt out of the Presumptive Taxation scheme?

Yes, you can opt out of the scheme, but you must comply with regular tax filing requirements.

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