Presumptive Taxation for Business and Profession

Latest Update

Budget 2023 has amended Section 44AD and Section 44ADA to revise limits for presumptive taxation from FY 2023-24 (AY 2024-25) as follows:

*The increase in limits is subject to a condition that cash receipts shall not exceed 5% of the total receipts.

In this article, we will deep dive into the various aspects that will affect you when you are starting a new business venture or you are opting for a new freelance gig.

Section I: Businesses

Selecting the Legal Entity

Setting up a new venture? One of the first questions you encounter when you begin your business is what legal entity it should be set up as. Depending on the nature and size of the business some of the legal entity options available are:

a. Sole Proprietorship

b. Limited Liability Partnership

c. Private Company

d. Public Company

e. Partnership Firm

As such, there is no legal rule that a ‘company’ must be formed to start a business. Incorporating a company has its own pros and cons. Forming a company increases compliance work. If your business is growing rapidly and becomes unmanageable, it is helpful if you keep it into a separate legal entity which will have its own PAN and will file a separate tax return. Else you may choose to carry on your business as a sole proprietor.

The presumptive taxation scheme applies exclusively to individuals, Hindu Undivided Families (HUFs), and partnership firms (excluding LLPs). Therefore, choosing the correct legal entity is crucial for availing these benefits.

Example: XYZ ltd. has a turnover of Rs. 1.8 crores and it wants to avail the benefit of presumptive scheme. Can it avail the benefit of presumptive scheme? No, as it is a company it cannot avail the benefit of presumptive scheme.  

Maintaining Books of Accounts

If as a business any of the following criteria are met, then maintaining the books of accounts as per the income tax act is mandatory:

a. Income is more the Rs. 1,20,000; or

b. Total sales, turnover or gross receipts are more than Rs. 10,00,000. 

In any of the three immediately preceding previous years. This condition has further been relaxed for individuals and HUF where they will be required to maintain books of accounts only if:

a. Income is more than Rs 2.5 lakhs or

b. Total sales, turnover or gross receipts are greater than Rs 25 lakhs. 

In any of the three immediately preceding previous years.

Note:

The penalty for non-maintenance of books of accounts:

If you have not maintained the accounting records which you should have maintained as per law, you would be liable for a penalty of up to Rs 25,000 as per Section 271A.

Tax Audit

For businesses having gross receipts/turnover more than Rs 1 crore in a financial year are liable for tax audit. However, the limit of Rs. 1 crores is increased to Rs. 10 crores if the cash receipts and cash payments does not exceed 5% of the total receipts and total payments respectively. 

The due date of filing the tax audit report is 30th September of the assessment year. The tax audit report must be filed electronically via Form 3CD. For taxpayers subject to tax audit, the due date for filing of return of income is 31st October of the assessment year. Under normal circumstances, revision of a tax audit report is not possible. However, in cases where the accounts have been revised it is possible to revise the tax audit report.

Due Date

• Due date for filing of tax audit report – 30th September of the assessment year
• Due date for return filing (if tax audit is applicable) – 31st October of the assessment year
• Due date for return filing (if tax audit is not applicable) – 31st July of the assessment year

Presumptive Taxation

Presumptive taxation for businesses is covered under Section 44AD of the income tax act. Any business which has a turnover of less than Rs 2 crore can opt to be taxed on presumptive basis. They must declare profits of 8% of turnover/gross receipts for non-digital transactions or 6% for digital transactions, whichever is applicable. The following businesses are not allowed to opt for presumptive taxation:

a. Life insurance agents.

b. Commission of any kind.

c. Running the business of plying, hiring or leasing goods carriages (Presumptive Taxation available u/s 44AE).

The limit of Rs. 2 crores has been increased to Rs. 3 crores for the taxpayer whose cash receipts does not exceed 5% of the total receipts.

Computation of Income under Presumptive Taxation

Example:

Lalit Traders have gross receipts of Rs 1.5 Crore for FY 2023-24 and do not maintain books of accounts. Lalit traders have opted for presumptive taxation. During the year Lalit Traders received Rs. 70 Lakhs through non-digital transactions (cash payments) and Rs. 80 Lakhs through digital transactions. 
What will be the income under the head 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   

Note: Since 95% of the receipts are not received in the digital mode the turnover limit for opting presumptive scheme is Rs. 2 Crore. 

Benefits of Presumptive Taxation

• If you opt for presumptive taxation under Section 44AD, your net income is considered as 8% of your turnover and you will pay tax on that income.
• If your receipts are in digital (non-cash) form then only 6% of your receipts is your net income and you will pay tax on that income. You must receive your digital receipts on or before filing of return of income, otherwise you will need to pay tax @ 8% on the same.
• You need not maintain accounting records.
• You are not required to do audit.
• You have to pay advance tax – but instead of estimating income and paying tax each quarter, you can pay all your advance tax before March 31. Advance tax, for taxpayers having opted for the presumptive scheme, is to be paid by 15th March of the relevant financial year if you expect that your income tax liability will exceed Rs.10,000 in the financial year.

International Transaction

TDS Deducted by the Foreign Client

If you work for clients out of India, payments may be received by you via paypal or as a direct credit to your bank account. Mostly, the foreign client would deduct taxes before releasing the payment to you in accordance with the local tax laws there. You, as a resident of India, would anyway be liable to income tax on all your income. However, you can claim credit for taxes paid overseas, in your return of income as per the provisions of Section 90/91.

TDS not Deducted by the Foreign Client

If no TDS has been deducted, there is nothing to worry. You need to include these receipts in your total income while making income calculations and pay applicable tax on them since you will be a tax resident of India. To meet advance tax requirements you may have to estimate your annual income from all sources.

Return of Income

An individual or HUF carrying on business will be bound to file his return of income in form ITR 3. However, if you are a taxpayer who opts for presumptive tax is supposed to file his return in ITR 4.

Section II: Professionals

Specified Professions for the purpose of Indian Tax Laws

• Engineering
• Legal
• Architectural profession
• Accountant
• Medical
• Technical consultant
• Interior decoration

Maintenance of Books of Accounts

Professionals Carrying on Specified Professions

Professionals carrying on the above mentioned specified professions are required to maintain books of accounts in accordance with Rule 6F of the Income tax Rules. Such professionals will be required to maintain accounting records if gross receipts exceeds Rs. 1.5 lakhs in all of the 3 immediately preceding years. In case he has started off with his profession in a particular year and his receipts exceed or is expected to exceed Rs 1.5 lakhs for that year, he is again supposed to maintain accounting records for that year.

These are the accounting records that have been prescribed under Rule 6F.

i. Cash Book – A book to record all the cash receipts and payments which helps you know your cash balance at the end of the day or end of the month.

ii. Journal – You have to maintain a log of all your day to day transactions . In accounting terms, you have to record all the debits and credits, when you are following the mercantile system of accounting.

iii. Ledger – A book where all your entries flow from journal, has details of all the accounts and simplifies the preparation of your financial statements at the end of a year

iv. You have to maintain photocopies of all the bills or receipts if the value is more than Rs. 25

v. Lastly, you have to maintain the original bills or receipts if the value is more than Rs. 50. 

vi. If you are into the medical professions, you must maintain these additional records too. i.e., a. Daily case registers with details of patients, fees received, services provided and date of receipt or b. Stock details of the medicines and other consumable items on the daily basis

Professionals Carrying on Non-Specified Professions

If you are carrying on any profession other than those discussed above, you would need to maintain such books of accounts so as to enable an assessing officer to calculate your taxable income as per Income tax laws. However, this mandate would arise only when your income exceeds Rs. 2.5 lakhs or gross receipts are more than Rs. 25 lakhs in any one of the immediately 3 preceding years, in case of an individual taxpayer.

Computation of Taxable Income

A professional could easily arrive at his taxable “Income under the head Profits and Gains from Business or Profession” by reducing all his profession-related expenses from this gross receipts out of the profession. The profession-related expenses could be salary paid to staff(if you have engaged someone), rent for the premises from where you are carrying out your profession, internet expenses, mobile expenses, official travel, lunch expenses (met officially), depreciation on fixed assets etc.

Example:

Archana is an interior designer. She has received a gross revenue of Rs 15 lakhs from her profession for the FY 2022-23. She has incurred the following expenses:

• Internet and mobile – Rs 25,000
• Salary paid to 2 staff – Rs 3 lakhs
• Rent for premises – Rs 1.5 lakhs
• Lunch expenses – Rs 24,000
• Travel expenses – Rs 1.5 lakhs

Here is how we determine her taxable income from business:

This income will be added to other taxable income of Archana, the aggregate sum on which she is supposed to pay her taxes at rates applicable to the income slab she falls under.

Tax Filing

As a professional, the form applicable to you is ITR 3. You will be liable to file your return on or before 31st July of the Assessment Year unless you are subject to an audit under the Income-tax Act.

Applicability of Tax Audit

You would be liable for carrying out a tax audit if your gross revenue from profession exceeds Rs 50 lakhs during any given financial year, Failure to get your books audited can attract a penalty of upto 0.5% of your gross revenue of Rs 1.5 lakhs whichever is lower.

Presumptive Taxation

A professional having a gross revenue upto Rs 50 lakhs can opt for the presumptive scheme of tax wherein he can straightaway offer 50% of the gross revenue as his taxable income and pay taxes as per his slab rates on such income. Once he opts for this scheme, he cannot claim any of the profession related expenses as a deduction again.

The limit of Rs. 50 lakhs is increased to Rs. 75 lakhs in a case where the cash receipt does not exceed 5% of the total receipts.
Further, anyone opting for this scheme is not bound by the mandate of maintaining books of accounts too. While he is still liable to file his return by 31 July of the assessment year, he must file his return in ITR 4. He is not required to get the audit as per provisions of Section 44AB.
Further, he will be liable for tax audit in a scenario where he offers income lesser than the income arrived at on presumptive basis and his income exceeds the basic exemption limit.
Here is a simple example to help make you understand when this scheme can be opted for: 

Example:

Rakesh is a practicing doctor and has an annual income of Rs 30 Lakhs in financial year 2022-23. The actual expenses incurred by Rakesh for running his practice amounts to Rs 3,00,000. The tax liability for Rakesh for FY 2022-23 is as follows: 
 

Therefore it is evident that if Rakesh follows presumptive taxation, he will be able to save Rs. 3,60,000 from his tax outgo. Further, Mr. Rakesh can benefit more if he opts for new regime along with presumptive taxation.

Freelancers Income

Freelancers who are into any of the specified or non-specified professions, get covered under the same rules as applicable to any other full-time specified or non-specified professional be it rules of computation of taxable income and tax liability, maintenance of books of accounts, presumptive tax, return filing etc.

Section III: Others

Glossary of Terms

The Indian income tax law runs into hundreds of pages. There is no good reason for you to spend precious time finding your way through it. Here’s a little glossary to help you master some basic tax terms which can be very handy while filing your tax returns.

Books of Accounts

Books of accounts means a record of all income, expenses, assets and liabilities of your business. These financial records are essential for understanding the performance of your business. These may be compulsorily required in some cases as per the limits mentioned above and under Section 44AA.

Deductions

To calculate taxable income from all the five heads is summed up and is called gross total income. From this gross total income, deductions can be claimed. These deductions reduce your total tax outgo since they lower your gross total income. Investments such as PPF, NSC or certain expense like life insurance premium, interest on education loan, medical insurance are allowed as deduction from your gross total income.

Exemptions

There are certain incomes which are not liable to tax even if you earn them during the previous year as per the tax laws. If the income is exempt as per the provisions, you need not include the same for the calculation of your gross total income. Section 10 of the Act provides a list of incomes which are to be considered as exempt.

Depreciation

When you purchase a capital asset, the benefit of such an asset is usually expected to last more than a year, such assets are ‘capitalized’ and not charged to expenses when they are bought. Every year a small portion of its cost is expensed and is allowed to be reduced from your income. This expense which is charged every year is called depreciation.

Tax Deduction at Source (TDS) / Tax Collected at Source (TCS)

Persons responsible for making payments have to deduct a certain percentage as tax before making payment. The tax department wants payers to deduct tax beforehand and deposit it instead of waiting for you (the recipient) to make the tax payment yourself. The recipient of income receives the net amount (after deduction of tax at source). The recipient adds the gross amount to his income. TDS is adjusted against final tax due, since it is tax already deposited on the recipient’s behalf, you can claim the TDS deducted from your income. TDS ensures steady flow of taxes for the government as well as acts as check on non-filers as they need to file the return to claim the tax deducted.

The rationale behind TDS/TCS is same but in case of TCS a certain percentage of tax is deducted by the recipient, i.e., you need to pay over and above your liability to enable him to collect tax as per the provisions.

Advance Tax

Government requires you to estimate your yearly income in advance and pay tax on estimation basis in quarterly installments. It is called Advance tax. It should be paid in advance instead of lump sum payment at year end. It is also known as ‘pay as you earn’ tax. These payments have to be made in installments as per due dates provided by the income tax department.

Form 26AS

Form 26AS has all tax related information of your PAN. It shows how much tax has been received by the government against your PAN. It includes TDS, tax directly deposited by you, refunds made to you etc. You can understand how to view and download your Form 26AS

AIS (Annual Information Statement)

The concept of AIS is newly introduced by the tax department. AIS is an extension of Form 26AS, where you can view as well as modify the values provided by the department basis the information submitted by the tax deductors, SFT filers etc. It shows both reported values (value reported by reporting entities) and modified values (values after modification by the taxpayer)

Tax Audit

Tax audit is a review of your financial records by a Chartered Accountant.

Your books must be audited if:

a. You are a professional earning gross receipts exceeding Rs.50 lakhs

b. A Business owner with an annual revenue of over Rs.1 crores (Limit increased to Rs. 10 crores if your cash transactions does not exceed 5% of the total transactions)

c. You have opted for presumptive taxation and you want to declare your income below the prescribed percentage but your total income exceeds the basic exemption limit of Rs. 250,000

Digital Signature

While filing the tax audit report, both the CAs signature as well as yours need to be included. For this, you must get a digital signature. Digital signature certificate comes with validity of one/two years.

Defective Return Notice under 139(9) for freelancers

When you file an income tax return using the ITR-3 Form, and you have ticked against “Are you liable to maintain accounts under section 44AA” but have failed to provide full details in P & L and Balance Sheet sections in the return, your return would be treated to be defective under Section 139(9) and you will return a notice for the same.

List of Deductible Expenses

• Rent for individual or shared office space
• Work-related meal and travel expenses
• Advertising, promotional and printing expenses
• Depreciation on assets such as laptops or computers. See Income Tax Department’s list of depreciation rates
• Income tax return filing fees paid to private platforms like ClearTax
• Travelling expenses for professional work
• Conveyance expenses