Presumptive Taxation for Business and Profession

Taxation for business and profession was complex with the requirement to maintain complex accounts, conduct audits and comply with various regulatory requirements. All these were a burden on businesses and professionals carrying out practice on their own. In order to give a boost to such small enterprises, the concept of Presumptive Taxation was introduced. 

The concept of presumptive taxation allows eligible businesses and professionals to calculate their profits as a percentage of their turnover. This gave an opportunity to compute taxes in an easier manner and avoid various cost and time consuming processes which in turn ensured more earnings. 

In this article we will understand presumptive taxation, to whom it is applicable and how it works.

Budget 2025 Update

It has been proposed to insert a new section 44BBD to cater non-residents providing services or technology to a resident, operating business related to electronics manufacturing. Such non-residents will be able to calculate profits at 25% of the amount received for such services.

What are 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.

Applicability for Maintenance of Books of Accounts

As a business or profession, if in any of the three immediately preceding precious years, any of the following criteria are met i.e., if the turnover or income exceeds the following limits, then maintaining of books of accounts as per the income tax act is mandatory:

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.

Note: The penalty for non-maintenance of books of accounts:

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

Tax Audit

A Tax Audit is an examination of the Books of Accounts of the business or a person carrying out a profession. Such an audit helps to verify and check transactions associated with Income, Expenses, Taxes, etc. 

Any Business or Profession whose turnover exceeds the following threshold limit will be required to conduct a Tax Audit. 

Return of Income

A taxpayer who opts for presumptive taxation is supposed to file his return in ITR 4.

Due Date for Return Filing

The important dates to remember are as follows;

• Filing of tax audit report –  by 30th September of the assessment year
• Return filing (if tax audit is applicable) – by 31st October of the assessment year
• Return filing (if tax audit is not applicable) – by 31st July of the assessment year
• Return filing (if having international transactions) – by 30th November of the assessment year.

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

Section I: Businesses

The presumptive taxation scheme applies only  to:

• Individuals
• Hindu Undivided Families (HUFs)
• Partnership firms (excluding LLPs). 

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

Presumptive Taxation

Presumptive taxation for businesses is covered under Section 44AD of the income tax act. Any business whose turnover does not exceed the following limits can opt for Presumptive Taxation under Section 44AD.

Turnover limits for Applicability of Section 44AD for Small Business:

Eligible businesses opting for Presumptive Taxation 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 eligible 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).

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.

Section II: Professionals

Individuals carrying on the following Specified Profession can opt for 44ADA

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

Presumptive Taxation

Presumptive taxation for professionals is covered under Section 44ADA of the income tax act. Any business whose turnover does not exceed the following limits can opt for Presumptive Taxation under Section 44ADA.

Applicability of Section 44ADA for Professionals:

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 under New Tax Regime for FY 2024-25 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, 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.

Points to Remember:

There are two main points that a person opting for presumptive taxation is  required to know;

• Any person opting for Presumptive Taxation is required to follow the same for five consecutive years. If they opt out of presumptive taxation, then they will not be allowed to opt for the same for the next five years.
• Assesses opting for Presumptive Taxation are required to pay the whole amount of Advance Tax in a single installment on or before 15th March of every financial year.

Benefits of Presumptive Taxation

• If you opt for presumptive taxation, your net income is considered as a percentage of your turnover and you will pay tax on that income.
• You need not maintain accounting records.
• You are not required to do an 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.