Presumptive taxation: The scheme that eases burden on small businesses
- Presumptive taxation scheme is aimed to reduce the compliance burden on small businesses and professionals.
- Income tax provisions allow eligible taxpayers to calculate their taxable income at specified rates and pay tax accordingly.
- Taxpayers opting for presumptive taxation do not have to maintain detailed books of accounts.
- Business Insider India spoke to tax experts to decode and simplify what presumptive taxation is all about and how it is different from regular taxation provisions.
AdvertisementRunning a small business or a professional service can often involve a single person or a few people juggling many tasks. To allow them to focus on core business, there is a special provision of presumptive taxation in the Income Tax Act that simplifies the process of tax assessment.
The presumptive taxation scheme allows you to pay tax based on your presumptive income. This makes filing income tax returns easier and allows small taxpayers under this scheme to pay taxes based on an estimated income instead of keeping a track of every single receipt and payment.
Simply put, the presumptive taxation scheme significantly reduces the overhead that is usually involved in maintaining books of accounts and following compliances.
“Under presumptive taxation, taxpayers declare their income or profit based on a presumptive rate, which is fixed by the tax authorities. This rate is generally lower than the actual rate, which allows taxpayers to pay lower taxes,” Sanjiv Bajaj, joint chairman & managing director, Bajaj Capital, told Business Insider India.
How is presumptive taxation different?
Presumptive taxation allows taxpayers to declare income at or above the rate specified under the relevant provisions of the Income Tax Act, 1961. It also reduces the compliance burden on taxpayers, as they do not have to maintain detailed books of accounts, which is mandatory under the regular tax provisions.
Explaining the difference between the two, Akhil Chandna, partner, Grant Thornton Bharat LLP, said, “Regular taxation computes taxable income after deducting actual expenses incurred; however, in presumptive taxation, the income computed at the presumptive rate is the final taxable income, with no further deduction of expenses allowed.”
It is worth noting that certain taxpayers will still have to maintain a few books of accounts like a cash book, journal, ledger and in case of doctors, a register of patients, stock details of medicines, etc.
Who is eligible for this scheme?
Presumptive taxation is available to the following types of taxpayers under the Income Tax Act, 1961:
|Section||Eligible assessee||Turnover/Gross receipts|
|44AD||Resident individual, resident Hindu Undivided Family (HUF), resident partnership firm other than LLP engaged in eligible business||₹2 crore (₹3 crore* from AY24-25)|
|44ADA||Resident individual, resident Hindu Undivided Family (HUF), resident partnership firm other than LLP engaged in any profession||₹50 lakh (₹75 lakh* from AY24-25)|
|44AE||Any person engaged in the business of plying, hiring or leasing of goods carriages, not more than 10 during the year||Light goods vehicle - ₹7,500 per vehicle per monthHeavy goods vehicle - ₹1,000 per vehicle per month|
Source: Income Tax Act, 1961 | *enhanced limits applicable only if 95% of the receipts are through online modes
“For taxpayers opting for presumptive taxation under Section 44AD or 44ADA, only one advance tax installment is payable before March 15 of the concerned financial year,” Chandna added, explaining another benefit of the presumptive taxation scheme.
How to compute taxable income under presumptive taxation?
Computing taxable income under the presumptive taxation scheme is very simple.
|Section||Computation of taxable income|
|44AD||Cash receipts - 8%Receipts through digital modes - 6%|
|44ADA||50% of gross receipts|
|44AE||Light goods vehicle - ₹7,500 per vehicle per monthHeavy goods vehicle - ₹1,000 per vehicle per month|
AdvertisementSource: Income Tax Act, 1961
Taxpayers opting for presumptive taxation cannot claim any expenses incurred as a deduction. Additionally, they do not have to get their books of accounts audited.
However, if their declared income is lower than the rates prescribed, an audit may be required.
What is the tax rate under presumptive taxation?
Chandna further explained that the tax rate under presumptive taxation is the same as it is under regular taxation. This means that once the taxable income is calculated, tax liability will be computed according to the applicable slab rates.
AdvertisementFor example, a taxpayer has gross receipts of ₹30 lakh and opts for presumptive taxation under section 44ADA. According to provisions, the taxable income will be ₹15 lakh. The tax liability on this will be arrived at using slab rates.
As per slab rates applicable for PY 2022-23 (AY 2023-24), the total tax liability is ₹2.73 lakh.
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