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Taxes can be complicated for small business owners and professionals. Keeping up with all the rules, calculations and paperwork takes time away from growing your business.
Luckily, the Indian Income Tax Act provides a simplified “presumptive taxation” scheme that makes taxes easier for small businesses and professionals.
In this comprehensive guide, we’ll explain everything you need to know about presumptive taxation, including:
- Who qualifies for the presumptive schemes
- How to calculate taxable income
- Key benefits
- Filing due dates and requirements
- Recent changes in Budget 2023
- And more
Whether you’re just starting out or are an experienced business owner, read on to see if opting for presumptive taxation could save you time and effort this tax season.
An Overview of Presumptive Taxation in India
The presumptive taxation system was introduced to reduce the tax compliance burden for small businesses and professionals.
Under this scheme, the Income Tax Department provides simplified methods to calculate your tax liability based on “presumed” income at a fixed percentage of your turnover.
You don’t need to maintain detailed books of accounts or get an audit done. Your income tax return filing also becomes easier.
In Budget 2023, the government raised the presumptive taxation limits to further reduce compliance burden:
| Category | Previous Limits | Revised Limits |
|---|---|---|
| Sec 44AD for small businesses | Up to Rs. 2 crore turnover | Up to Rs. 3 crore turnover* |
| Sec 44ADA for professionals | Up to Rs. 50 lakh gross receipts | Up to Rs. 75 lakh gross receipts* |
*Increased limits only apply if you receive 95%+ receipts digitally
These higher thresholds widen the eligibility for the presumptive taxation scheme. Digital payment condition also nudges small businesses to adopt cashless transactions.
Now let’s look at how the scheme works for small businesses and professionals…
Section I: Presumptive Taxation for Small Businesses
The presumptive taxation scheme under Section 44AD of the Income Tax Act is a beneficial option for small businesses with turnover up to Rs. 3 crores (increased from Rs. 2 crores in Budget 2023).
Here are the key details about this scheme:
Who is Eligible for Section 44AD?
You can opt for the presumptive taxation scheme under Section 44AD if you are a resident Indian who runs a small business with turnover up to Rs. 3 crores.
The following businesses cannot opt for this scheme:
- Businesses related to commissions or brokerage
- Professionals earning income from services
- Persons earning income in the form of salary
- Persons earning income from speculative businesses
Your business should also not be affected by any other presumptive taxation sections like Section 44AE (transporters), 44BB (foreign companies), etc.
How to Calculate Presumptive Income
Under Section 44AD, your presumptive income will be calculated as:
- 8% of total turnover if receipts are by non-digital means
- 6% of total turnover if receipts are by digital means
For example, if your business has a turnover of Rs. 30 lakhs, out of which Rs. 15 lakhs is received digitally, your presumptive income will be calculated as:
- Non-digital turnover: Rs. 15 lakhs
- @8% rate: Rs. 15 lakhs * 8% = Rs. 1.2 lakhs
- Digital turnover: Rs. 15 lakhs
- @6% rate: Rs. 15 lakhs * 6% = Rs. 0.9 lakhs
- Total Presumptive Income = Rs. 1.2 lakhs + Rs. 0.9 lakhs = Rs. 2.1 lakhs
This income will be taxed at the applicable slab rate. You can simply pay tax on this presumed income without any further calculations.
What are the Benefits of Presumptive Taxation u/s 44AD?
Opting for presumptive taxation can make compliance much simpler for small businesses:
- No need to maintain books of accounts – You can declare income based on the prescribed percentage without any documentation. Maintaining account books, stock records, bills, invoices etc is not required.
- No audit requirement – Getting your accounts audited by a CA is not required if you opt for Section 44AD. This saves time and audit fees.
- Lower administrative costs – Since detailed record keeping is not required, you save on costs of stationery, account software, accountant fees etc.
- Lower tax liability – For some businesses, declaring 8% of turnover as profit can result in lower taxes than the actual profit. So presumptive taxation reduces tax outgo.
- Simple advance tax – You only need to pay 100% advance tax by 15th March instead of estimating advance tax liability every quarter.
Clearly, the presumptive taxation scheme makes life much simpler for small businesses!
What is the Due Date for Filing Tax Returns?
If you have opted for presumptive taxation u/s 44AD, the due date for filing ITR is 31st July of the assessment year – just like it is for all non-audit cases.
However, you must file your returns using ITR 3 or ITR 4 as applicable. The normal ITR 1 or ITR 2 cannot be used by presumptive taxpayers.
Is Advance Tax Required?
Yes, you will need to pay advance tax if your estimated tax liability for the year exceeds Rs. 10,000.
However, you don’t need to pay advance tax in installments. The entire 100% advance tax can be paid in one go by 15th March of the financial year.
For instance, for FY 2022-23, 100% advance tax should be paid by 15th March 2023. This makes compliance easier.
Can You Opt Out of the Presumptive Taxation Scheme?
You have the option to opt in and out of the presumptive taxation scheme u/s 44AD. However, there are some conditions:
- Once opted for, you must follow the presumptive scheme for a block of 5 years.
- If you opt out in any year before the 5 year block ends, you will not be eligible to opt for the scheme for the next 5 years.
So you must carefully consider the pros and cons before deciding to opt out prematurely.
Section II: Presumptive Taxation for Professionals
Professionals like doctors, lawyers, architects, accountants, engineers etc. can avail presumptive taxation benefits under Section 44ADA.
Here are the key details about how this scheme works:
Who is Eligible for Section 44ADA?
The presumptive taxation scheme under Section 44ADA is available for resident Indian professionals whose gross receipts from the profession do not exceed Rs. 75 lakhs in a financial year.
This limit was increased from Rs. 50 lakhs in Budget 2023.
The following professionals can opt for this scheme:
- Doctors
- Lawyers
- Architects
- Engineers
- Accountants
- Technical consultants
The scheme cannot be availed by professionals engaged in brokerage services or commission-based work.
How to Calculate Presumptive Income
If you opt for Section 44ADA, your presumptive profit and gains from profession will be:
50% of Gross Receipts
So if your annual gross professional receipts are Rs. 30 lakhs, your presumed income will be:
Rs. 30 lakhs * 50% = Rs. 15 lakhs
You only need to pay tax on this income without claiming any expenses. Actual profit could be lower, but to simplify compliance, 50% of receipts are taken as profit.
What are the Benefits of Presumptive Taxation u/s 44ADA?
Opting for the presumptive taxation scheme provides these benefits for professionals:
- No need to maintain detailed books of accounts – By declaring 50% of receipts as income, you avoid the hassle of book keeping.
- Potentially lower tax – For some professionals, 50% of gross receipts as profit may work out lower than actual profit (after claiming expenses). So taxes reduce.
- No audit requirement – If you opt for Section 44ADA, mandatory tax audit u/s 44AB will not apply even if your gross receipts exceed the threshold (currently Rs. 1 crore).
- Save time & costs – Since detailed record keeping is not needed, it saves time and costs for a practicing professional.
- Simple advance tax – You only need to pay 100% advance tax for the year by 31st March instead of quarterly installments.
What is the Due Date for Filing Tax Returns?
The due date for filing returns under the presumptive taxation scheme u/s 44ADA is 31st July of the assessment year.
You need to use ITR 3 or ITR 4 for filing returns. Normal ITR 1 or ITR 2 cannot be used by professionals availing this scheme.
Is Advance Tax Required?
Yes, 100% advance tax should be paid by 31st March of the financial year if your estimated tax liability for the year exceeds Rs. 10,000.
You don’t need to pay advance tax in installments if you opt for Section 44ADA.
Can You Opt Out of the Presumptive Taxation Scheme?
Yes, you can choose to opt out of the presumptive scheme. However, these conditions apply:
- Once opted for, you should follow it for a block of 5 years.
- If you opt out before the 5 year block ends, you cannot opt for the scheme again for the next 5 years.
So carefully assess your situation before deciding to opt out prematurely.
Section III: Key Tax Terms and Concepts
As a business owner or professional, you must be familiar with some key tax-related terms and concepts. Understanding these will help you make informed tax decisions:
Books of Accounts
Books of accounts or financial statements record all business income, expenses, assets and liabilities. If mandatory, these have to be maintained as per income tax rules.
Advance Tax
Advance tax means paying income tax through installments across the year instead of a lump sum at the end. Applicable if estimated tax exceeds Rs. 10,000.
Tax Deduction at Source (TDS)
TDS means the payer deducts tax before making payments to the recipient. TDS is added back while computing total income of the recipient.
Depreciation
Depreciation is the expense charged annually to account for reduction in value of fixed assets like machines, furniture etc. The IT Act has prescribed depreciation rates.
Form 26AS
Form 26AS is your tax passbook. It summarizes all the taxes paid against your PAN like TDS, advance tax, self-assessment tax etc.
Tax Audit
Tax audit involves a CA scrutinizing your accounts and certifying that tax has been computed correctly. Mandatory in some cases.
Digital Signature
Digital signature acts like an e-signature. It is needed for electronically signing and filing various documents like audit reports, tax returns etc.
Having clarity on these key terms is important for understanding your tax obligations and availing benefits like presumptive taxation. Consult a CA if you need assistance.
Section IV: Frequently Asked Questions
Here are answers to some common questions about presumptive taxation for businesses and professionals:
Q. I run a grocery shop with turnover of Rs. 40 lakhs. Can I opt for presumptive taxation?
Yes, you can opt for the presumptive taxation scheme u/s 44AD since your turnover is within the Rs. 3 crores limit. Maintaining detailed accounts will not be mandatory.
Q. I am a doctor with gross receipts of Rs. 18 lakhs. Am I eligible for presumptive taxation?
Yes, you can avail the benefit of presumptive taxation under Section 44ADA since your gross receipts are less than the Rs. 75 lakhs limit. You can declare 50% of receipts as taxable income.
Q. What are the forms to file tax returns under the presumptive taxation scheme?
You have to file returns in ITR 3 or ITR 4 (not ITR 1 or ITR 2). In ITR 3/4, you have to tick the box that says “Presumptive taxation sections 44AD, 44ADA, 44AE, etc. are applicable”.
Q. I opted for presumptive scheme last year. This year, actual profits are lower. Can I declare actual profits instead?
Once you have opted for presumptive taxation, you have to declare income as per the applicable presumptive sections (44AD, 44ADA etc.). You cannot switch to actual profits unless you opt out of the scheme. But opting out has restrictions.
Q. I am a partnership firm. Can I opt for presumptive taxation u/s 44AD?
Only resident individuals, HUFs and partnership firms (not LLPs) can avail Section 44AD. Your turnover from business should be within Rs. 3 crores. Professionals earning professional fees cannot avail this section.
Q. I am a lawyer covered under presumptive taxation. Do I need to get a tax audit done?
No, if you have opted for presumptive taxation u/s 44ADA, you will not need a mandatory tax audit u/s 44AB even if your gross receipts exceed Rs. 1 crore (the usual threshold).
Q. What are the payment due dates for advance tax for presumptive taxation?
You need to pay only one installment of advance tax by 31st March for presumptive sections 44AD and 44ADA. You don’t need to pay advance tax in installments each quarter.
We hope these FAQs have helped you better understand presumptive taxation for small businesses and professionals. Feel free to reach out for any other queries.
Summing It Up
The presumptive taxation schemes under Sections 44AD and 44ADA are meant to simplify compliance and reduce tax burden for small taxpayers. Opting for them means you can avoid detailed record-keeping, audits and use simpler profit calculation methods.
Budget 2023 further improved the schemes by raising the turnover/receipts threshold for eligibility. This expands the scope of presumptive taxation.
However, you must be mindful of the conditions and restrictions applicable for presumptive taxation. Consult a CA to determine if opting for these sections suits your specific business situation.
Accurate tax compliance is essential, so don’t hesitate to seek professional help. This can save potential interest and penalties later.
For small business owners and professionals looking for help with presumptive taxation, FilingWala.com offers reliable online services. Their tax experts can help you fully optimize these beneficial provisions based on your situation. Visit their website to learn more and get started!
