What is presumptive taxation and how it is beneficial for small businesses, professionals? Expert explains

Presumptive tax: In order to boost micro-enterprises, the government in the assessment year 2017-18 introduced presumptive taxation. Under presumptive taxation, small businesses and individual professionals are exempted from maintaining books of accounts.

The government in the budget 2023 extended the limit for presumptive tax for small businesses from Rs 2 crore to Rs 3 crore and for individual professionals from Rs 50 lakhs to Rs 75 lakhs. Anup Bansal, Chief Business Officer, Scripbox, said that the new limit will be applicable from the new financial year.

What is Presumptive Taxation?

In simple terms, taxpayers who opt for presumptive taxation do not need to estimate their income by deducting their expenses from revenue. Taxpayers only have to calculate a percentage of their total revenue and pay taxes on that.

Who can apply for presumptive taxation?

According to Archit Gupta, Founder and CEO, ClearTax, any individual, Hindu Undivided Family (HUL) or partnership firm (excluding LLP) who is a tax resident in India can opt for presumptive taxation specified for business and any Individual or partnership firm (excluding LLP)  who is a tax resident in India can opt for presumptive taxation specified for a profession.

How to apply for presumptive taxation?

“It can be opted at the time of filing the ITR. The applicable ITR forms for presumptive taxation are ITR 3 or ITR 4,” said Archit.

Factors to consider before filing a presumptive taxation

According to experts following factors should be considered before opting for presumptive taxation:

a. In case one is running a business and opting for presumptive taxes, it needs to be opted for 5 years continuously.

b. Taxpayers need to declare profit at the predetermined percentage i.e. at least 8 per cent  or 6 per cent for business depending on the mode of receipt and timeline of the receipt and at least 50 per cent for a profession.

c. If taxpayers are opting out of it before 5 years or declaring the profit at a lesser percentage then they will be subjected to a Tax Audit.

How to calculate presumptive taxation?

According to Anup, 8 per cent of the total turnover is presumed as the income of the taxpayer in case of cash receipts. However, for digital receipts (if more than 95 per cent of receipts are digital), a benefit of 2 per cent is given with the 6 per cent of the total turnover being accounted as taxable.

According to Archit, for specified professionals, the tax will be calculated on at least 50 per cent for professionals on the gross receipts/ turnover.

Income tax sections under presumptive taxation

The Income Tax Act has framed the Presumptive Taxation Scheme under sections 44AD, 44ADA and 44AE of the Income Tax Act, 1961.

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Section 44AD

This section is designed to give small business, resident individuals, resident Hindu Undivided family (HUF) and resident partnership firm taxpayers some relief. The taxpayers opting for the presumptive taxation scheme under section 44AD are liable to pay the whole amount of advance tax on or before March 15 of the previous year.

It should be noted that a person earning income in the nature of commission or brokerage cannot adopt the presumptive taxation scheme. Also, a person whose total turnover or gross receipts for the year exceed Rs 3 crore can’t opt for presumptive taxation scheme of section 44AD.

Earlier this limit was Rs 2 crore, but in the Budget 2023, this was raised to the new limit.

Section 44ADA

Specified professionals– legal, medical, engineering, accountancy, technical consultancy, interior decoration and any other profession notified by CBDT get relief under section 44ADA.

Professionals with less than Rs 75 lakhs per annum which was earlier Rs 50 lakhs income can avail the benefit of this section. The presumptive income is computed at the rate of 50 percent, which is considered the final income and after this, no further expenses are permitted.

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Taxpayers who opt for section 44ADA have to pay a whole amount of advance tax on or before March 15 of the previous year.

Section 44AE

Small businesses engaged in plying, hiring or leasing of goods carriages and who do not own more than 10 goods vehicles at any time during the year benefit under this section of the income Tax Act.

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