Presumptive Income Taxation Scheme: Business & Professionals

Running a small business or providing professional services, irrespective of the industry, takes much more than just running a firm. Presumptive taxation can be referred to as a shot in the arm for those with a tight schedule because it saves them time and effort. It is a concept introduced by the Income Tax Act of 1961 in India that streamlines the process of calculating income for certain minor taxpayers. Instead of keeping detailed books of account and undertaking onerous audits, qualifying taxpayers can declare income as a proportion of their overall turnover or gross receipts.

The Presumptive Income Tax Act of 1961 also requires an individual in a company or profession to keep proper books of account and have them audited. This can be a time-consuming and expensive process. As a result, to provide an alternative, the Government of India established the presumptive taxation plan under Sections 44AD, 44ADA, and 44AE. This article will deep dive into presumptive income/taxation, calculation, and other aspects.

What is Presumptive Income Taxation?

Presumptive taxation is a simplified approach to calculating taxes for small firms. This approach is intended to alleviate the tax burden on small enterprises by lowering compliance costs and streamlining the tax procedure.

Under presumptive taxation, firms are taxed based on their presumed income rather than their actual profits. This form of taxation presupposes that enterprises in specific industries have a minimum payment that can be used to calculate taxes.

Presumptive taxation is commonly utilized by small firms and self-employed people who have limited resources and may lack the ability to keep accurate financial records. In many circumstances, small enterprises may not have access to the same expert accounting and tax services as larger organizations.

What is Section 44ADA of the Income Tax Act?

Section 44ADA of the Income Tax Act applies presumptive taxes to certain professionals. It enables qualifying taxpayers to pay 50% of their gross income tax. This initiative is only available to those with a professional income under section 44ADA of less than ₹50 lakhs and working in specific occupations. Its goal is to simplify tax compliance while lowering the tax liability of small-time entrepreneurs.

Objectives

 Section 44ADA of the Income Tax Act has the following key objectives:

• Simplifying the tax structure for small businesses. This clause allows them to pay tax based on a predetermined percentage of gross receipts.
•  Reduce the tax burden on self-employed individuals. Paying tax on 50% of gross receipts reduces many professionals’ taxable income.
• Facilitation of simplified business procedures. Presumptive taxation relieves professionals of the burden of maintaining accounting records. Furthermore, Section 44ADA of the Income Tax Act minimizes account audits under typical circumstances.
• Section 44ADA of the Income Tax Act establishes parity among businesses. The act also facilitates the standardization and simplification of management for all eligible professions.

2024 Budget Update on Presumptive Taxation for small-time Business professionals

The presumptive taxation regime under Sections 44AD and 44ADA saw no substantial modifications in the Union Budget 2024. However, the following main characteristics were implemented in the previous budget and are still applicable:

The turnover ceiling for presumptive taxation under Section 44AD has risen from ₹2 crore to ₹3 crore. The maximum for professionals under Section 44ADA is now ₹75 lakh, up from ₹50 lakh previously.

Condition for enhanced Limits: Both enhanced limits are subject to the condition that at least 95% of total receipts are made via digital modalities.

Key Points to Remember in Presumptive Taxation Scheme:

• Businesses with a turnover of up to ₹3 crore (subject to 95% digital receipts criterion) are presumed to have revenue at 8% of gross receipts for non-digital transactions and 6% for digital transactions.
• Section 44ADA allows professionals with gross receipts of up to ₹75 lakh (subject to 95% digital revenues) to claim 50% of their earnings as income.
• There are no detailed books of accounts: Both approaches allow taxpayers to avoid keeping extensive books of accounts.

The following individuals don’t fall under the presumptive taxation scheme:

1. Life insurance agents.
2. Commission of any kind.
3. Running the business where you hire or lease goods carriages (Presumptive Taxation available u/s 44AE).

How to calculate 44AD Presumptive Income Under Section?

Section 44AD allows eligible small enterprises to disclose income as a percentage of total turnover or gross receipts. The following is the detailed process for estimating presumptive income:

• Determine the total turnover/gross receipts.
• Calculate the overall turnover or gross receipts of the company for the fiscal year.
• Apply Presumptive Income Rate.
• 8% of turnover or gross receipts falls under income
• 6% of total turnover or gross receipts for digital transactions
• Combine both types of transactions.
• Calculate the presumptive income individually for cash and digital transactions, then add them together to get the overall presumptive income.

Example of Presumptive Taxation

Pankaj Exports have gross receipts of Rs 1.5 Crore for FY 2023-24 and do not maintain books of accounts. They opted for presumptive taxation. During the year Pankaj Exports received Rs. 70 Lakhs through non-digital transactions (cash payments) and Rs. 80 Lakhs through digital transactions.

What will the income be under the head of business and profession?

Solution:

Income under the business and profession:

For non-digital transactions : 70,00,000 * 8% = Rs. 5,60,000

For digital transactions : 80,00,000 * 6% = Rs. 4,80,000

Income under the head “Business or Profession” will be = Rs 10,40,000  

What are the rates of Presumptive Taxation?

The rates of taxable income consideration for business taxpayers depend on the nature of the receipt.

Cash receipts are subject to 8% of the total amount received.

The fee for digital (non-cash) payments would be 6%.

For example, if your company earns ₹1 crore in the previous financial account and cash receipts up to ₹30 lakhs, your taxable income under presumptive tax legislation would be ₹6.6 lakhs (₹2.4 + ₹4.2 lakhs).

A professional who opts for presumptive taxation can compute their tax liability using 50% of their total revenue.

Insight about the Presumptive Taxation Scheme Under Section 44 AD

Section 44AD provides a simpler tax framework for small firms. Under this approach, taxpayers can assume their income is a particular percentage of their gross receipts without keeping full books of account.

Eligibility Criteria for the Presumptive Taxation Scheme Under Section 44 AD

• Indian resident
• Hindu Undivided Families (HUFs)
• Partnership firms, except Limited Liability Partnerships (LLP)
• There are other aspects to consider as taxpayers
• Individuals and organizations’ annual gross turnover shall not exceed ₹2 crores from the preceding year.
• Individuals and businesses may not claim a tax deduction under Sections 10A, 10B, 10AA, or 10BA during the assessment year.
• Individuals and businesses cannot claim tax breaks under Sections 80RRB and 80HH.

Also Read: Understanding Section 44AA: Audit Requirements for Freelancers

What are Benefits of Presumptive Taxation?

Small businesses or entrepreneurs falling under presumptive income or taxation can earn benefits, including-

Simplified tax-filing process

Filing an income tax return under the presumptive tax structure is substantially shorter, easier, and more efficient. This saves taxpayers time when filing returns and makes it easier for them to pay their taxes.

Low cost on IT return submission

The costs associated with submitting an income tax return are also significantly reduced. Taxpayers can easily file their returns. There is no need to pay a professional to complete the same task. This saves money that would have been spent on chartered accountants and tax specialists.

Allow taxpayers to reduce their tax liability

Taxpayers who choose the presumptive tax plan have less tax liability than those who do not. This system allows small business owners and professionals to claim 50% of their income as profit for the year. The remaining cash can be reported as expenses. This significantly reduces their tax liability.

Eliminates the hassle of keeping books of accounts

The method was created primarily to avoid the need to keep accounting records. Businesses and professionals who opt for the system might save time and money by not having to keep books of account.

Features of Presumptive Taxation Scheme under Section 44 AD

As a taxpayer, you can use section 44AD to calculate presumptive income for the current assessment year as 8% of the prior year’s yearly gross turnover.

• The annual turnover should be below ₹2 crores.
• Taxpayers can utilise the presumed income to calculate their net income for the current year.
• Taxpayers who use Section 44 AD must utilise ITR Form 4 to file their income taxes.
• If taxpayers choose Section 44 AD, they will be unable to claim a deduction under Sections 38 or 30.
• In the case of several firms, the tax is based on the total turnover of all businesses.
• Section 44 AD can be obtained using income from a business or profession. Income from the profession is taxed as ordinary income under the current income tax regime.

Presumptive Taxation Scheme Under Section 44ADA

Section 44ADA’s Presumptive Taxation Scheme is a useful feature for small business owners, as it simplifies tax calculations and makes compliance easier. Below are the eligibility criteria, along with other details.

Eligibility Criteria

• Resident individuals
• Hindu Undivided Families (HUFs)
• Partnership firms, except Limited Liability Partnerships (LLP)
• In addition to this, the following professions can use the presumptive taxation scheme under Section 44DA.

Restrictions of Presumptive Taxation Under Section 44 ADA

• The total gross revenues from a profession should not exceed ₹50 lakhs per year.
• Taxpayers must keep a book of accounts if their professional revenue is less than 50% of their gross receipts.
• If total income exceeds the basic exemption limit, taxpayers are required to keep a book of accounts.
• Taxpayers must pay the advance tax on or by March 15 of the previous year.

Conclusion

The presumptive taxation scheme is a smart way to lessen the burden of tax preparation and filing. This law allows you to lower your tax liability even if your business expenses are low.

Pratish is a seasoned financial writer with a profound understanding of the financial world. With years of experience in content development, especially in finance and IT, and being a commerce graduate, he offers valuable insights to help readers navigate the complex landscape of money management, GST and financial planning. With simple reading content, but with great information, Pratish keeps himself updated with the finance industry. In spare time, he loves binge watching series and socializing.