Presumptive Taxation for Business and Profession

What is Presumptive Taxation?

The presumptive taxation scheme was considered to reduce the tax compliance burden for small taxpayers. The individuals who are eligible can mention their income as a percentage of gross receipts. There is no need to maintain the long, detailed records.

The presumptive taxation ensures the honest reporting of the profits. It makes the tax filing process easier for professionals and businesses.

Presumptive Taxation for Businesses

The following entities are eligible for the Presumptive taxation scheme:

• Individuals
• Partnership Firms (not LLPs)
• Hindu Undivided Families (HUFs)

Let's take an example: A company named XYZ Ltd. has a turnover of 1.9 crores, and they want to claim the benefits under presumptive taxation. Then, it won't be possible for them because the companies are not allowed to claim the benefits under this scheme.

Presumptive Taxation

The presumptive taxation for business is covered under the Income Tax Act, section 44AD. Any business whose turnover does not go above the following presumptive taxation limit can claim the benefits of this scheme.

Limit for the turnover for the small businesses:

The eligible businesses that want to claim the benefits should declare the profits of 6% of turnover for the digital transactions and 8% for the non-digital transactions, whichever is applicable.

The following businesses cannot choose for the presumptive taxation 44AD: 

1. Any type of commission
2. Life insurance agents
3. Business of hiring or leasing goods carriages (available under section 44AE)

Computation of Presumptive Income

Example:

Ramesh traders do not maintain books of accounts, and they have the gross receipts of Rs 1.5 crore for the financial year 2023-24. They have opted for presumptive taxation. In that FY, they received Rs 80 lakhs through digital transactions and Rs 70 lakhs through cash payments. What will be their income under the head of business and profession?

Solution:

Income under the head of profession and business:
For cash payments: 70,00,000*8% = Rs 5,60,000
For digital payments: 80,00,000*6% = Rs 4,80,000
So, the total income will be Rs 10,40,000

Presumptive Taxation for Professionals

The individuals of the following professions can opt for the presumptive tax benefits:

• Legal
• Engineering
• Charted Accountant
• Technical Consultant
• Medical
• Interior Decoration
• Architectural Profession

Presumptive Taxation

The PT for the professionals is covered under the Income Tax Act, Section 44ADA. Any professionals whose income does not go above the given limit can opt for presumptive taxation.

The limit of turnover for professionals is:

Example:

Vikas has a financial income of Rs 30 lakhs in FY 2022-23 as a doctor. The expenses for running his practice are Rs. 3,00,000. Then, under the new tax regime for FY 2024-25, his tax liability is as follows:

From the above table, we can see that if Vikas follows the presumptive taxation, then he will be able to save Rs 3,60,000 from his tax liabilities. Vikas can get more benefits if he goes for the new tax regime with presumptive taxation.

Freelancers Income

The freelancers who are involved in any of the specified professions will be subject to the same rules. It will be similar to any other full-time specified or non-specified professional. Whether it is the rules of computation of taxable income and tax liability, presumptive tax, return filing, maintenance of books of accounts, etc.

Key Points to Remember

If you are opting for presumptive taxation, then there are two main points that you need to know:

• If an individual opts for presumptive taxation while filing for their income tax return, then they have to continue opting for it for the next five years. If they discontinue the presumptive taxation, then they won't be able to rejoin it for the next five years.
• The assessees who are choosing the presumptive taxation have to pay the whole amount of the advance tax on or before March 15 of every financial year. The payment should be made in a single installment.

Benefits of Presumptive Taxation

There are various benefits of presumptive taxation, a few of which are given below:

1. Less income, less tax: If you choose presumptive taxation, then your income will be considered as a percentage of your annual turnover. You have to pay the taxes on that income only.
2. No accounting records: You don't have to maintain any type of accounting records.
3. No audits: There is no need to do an audit for you.
4. Advance tax: Instead of paying tax each quarter and calculating the income, you can pay the advance tax all at once in March. If you have opted for presumptive taxation, then you need to pay the advance taxes on or before the 15th March of the financial year.

Importance of Presumptive Taxation

The presumptive taxation is important for the taxpayers in the following ways:

1. Fewer tax disputes: If there are clear guidelines about taxation, then the people will have a better understanding of the taxes. It will cause fewer disputes with the Income Tax Department.
2. Stops Underreporting of profits: The businesses that have higher profits cannot misuse the system of presumptive taxation.
3. Simplifies with Fairness: It helps in advancing the simplified tax filing process. It will lead to a fair contribution to the tax system of India.
4. Promotes honest tax practices: It promotes honest tax reporting and helps in building accountability in tax compliance.