written by Khatabook | July 22, 2021

Presumptive Taxation for Business and Profession

Presumptive taxation for business is a significant part of the Income Tax Act and is considered under Section 44AD. Taxpayers having Presumptive Income from Business and Profession with a gross revenue upto Rs 50 lakhs have the opportunity to opt this tax scheme. On the other hand, such a business or profession can offer 50% of their gross revenue as their taxable income and pay taxes accordingly as per their slab rates on such income. Read this article to know in detail. 

What Is Presumptive Income From Business And Profession? 

Maintaining all accounting information to calculate the loss/profit by yourself is hard. Especially if you are running a small business, have income from a profession or are a self-employed individual. Due to this, the tax liability is difficult to calculate and filing the requisite ITR or Income Tax return form is challenging. The Income Tax Department U/S 44 helps us understand the presumptive income meaning and has a set of provisions to help calculate your income presumptively. This is done by declaring your income as a percentage of the gross business receipts. Hence, the method is called the presumptive method due to its estimated/presumptive income and those opting for this scheme are liable to pay presumptive tax on income U/S 44AD of the Income Tax Act 1961.

ITR Form U/S 44

The Sugam ITR-4S Form is the right ITR or Income Tax Return form for taxpayers opting for taxation on a presumptive basis under the 1961 Income Tax Act’s Sec 44AD and 44AE. However, if the taxpayer’s business turnover or income under section 44AD for professionals is higher than Rs 2 Crore, you need to file ITR in Form ITR-4.

Note that the latest update for advance tax on dividends in Budget 2021 says the taxpayers need to pay taxes on dividends only after the payment or declaration of the dividend. Also, the AY 2017-18 or from FY 2016-17, ITR-4S forms for filing ITR have been discontinued. If you have filed an ITR-4S in FY 2015-2016, you will now need to file the ITR-4 form in FY 2021-22.

Presumptive Scheme Features

Let us take a quick look at the presumptive income tax scheme and the sections it covers U/S 44AD for professionals/small businesses. Section 44ADA is also for professionals and Section 44AE for taxpayers in the business of hiring, leasing or plying trucks.

Under this scheme for taxpayers having income from business and profession, the Net Income is presumed to be 8% of the gross business receipts. However, beginning from the FY 2016-2017 on, if the gross receipts are digital payments, the Net Income can be subject to presumptive taxation at the rate of 6% of the gross digital receipts, while for cash payments received, the presumptive tax rate is 8% of the receipts in cash.

The main differences compared to regular taxation if you opt for a presumptive taxation scheme are:

  • No books of accounts need to be maintained for your business.
  • You will have to pay 100% of the Presumptive Advance Tax by the financial year’s 15th of March.
  • There will be no need for the quarterly instalments of June/September/December on their respective due dates for advance tax.
  • No business expenses can be further deducted from the income.
  • If you run more than 1 business, you can choose to opt for the scheme for each of such businesses run by you.

Here’s an example regarding income from business and profession: 

Imagine you have income from three businesses. Only one of the businesses has presumptively opted for U/S 44AD of the IT Act. This business gets the relief of not having to opt for accounting and maintaining records, besides not requiring an audit. For the other two businesses not covered under this scheme, you have to keep accounting records and be liable for the audit requirement. The requirement of 100% Advance Tax being payable by the FY’s 15th of March is also available for this one business and not all three businesses.

Also Read: Tax Exemption and Its Various Categories 

Exclusions:

If the taxpayer with income from presumptive business also has income from other sources and the tax liability from such sources is greater than Rs 10,000 per annum, the taxpayer is liable to pay advance tax on such ‘other income’. 

The taxpayer cannot use this scheme when he claims deductions U/S 10, 10B, 10A, 10BA, 80HH all the way through to 80RRB in that relevant assessment year. 

Scheme Eligibility Criteria:

To be eligible for this scheme to tax presumptive business income, you need to satisfy the following conditions.

  • You must be an individual/ partnership firm/HUF or Hindu Undivided Family to opt for this scheme; it does not apply to a Company.
  • You must be an Indian resident.
  • Your business turnover or gross receipts should be less than 2 Crore to opt for the scheme.

Eligible income From Presumptive Businesses

Under this scheme, the taxpayer can be in a profession, business, freelancer, etc., involved in wholesale or retail trading, civil construction or other businesses. This presumptive method of computation of income does NOT apply to particular businesses like:

  • Brokerage and commission income under 44AD.
  • Running of agency business.
  • The business of hiring, plying, leasing of goods carriage U/S 44AE.
  • Professionals with income from profession listed U/S 44AA(1) in the fields of medical, legal, architectural, engineering, technical consultancy, accountancy, interior decoration, film artists, information technology professionals, company secretary and the business of being an authorised representative. 

Computing Gross Receipts/Turnover

  • The total collections from the business are considered turnover or gross receipts and include Excise/ VAT duties, delivery charges, receipts from the scrap sale, etc. However, money or advances received from the sale of assets and discounts given are to be excluded.

Professionals (U/S 44ADA) Presumptive Income Conditions:

Previously the benefit of presumptive taxation rates was available only for businesses. U/S 44ADA the benefit is extended to professionals as well. It applies to the professionals mentioned below:

  • The gross professional receipts are not greater than Rs 50 lakhs in the particular FY or financial year. 
  • The Presumptive Tax Rate will be assumed at 50% of the gross professional receipts for the financial year. 

By professionals, we mean those listed U/S 44AA(1) as professionals in the fields of medical, legal, architectural, engineering, technical consultancy, accountancy, interior decoration, film artists, information technology professionals, company secretary and the business of being an authorised representative. 

For instance, a ‘Film Artist’ means actors, producers, directors, cameramen, music directors, film editor, art or dance directors, singer, story writer, lyricist, screenplay writer, dress designer, dialogue writer or any individual involved in a professional capacity in film production U/S 44ADA. Therefore, an authorised representative is any person officially representing an individual for remuneration/fee before any legal authority/Tribunal. 

Presumptive Income U/S 44AE:

For those taxpayers in the business of leasing, plying or hiring trucks, a similar presumptive income is allowed U/S 44AE  for professionals of the presumptive income taxation scheme.

The main features under this section are:

  • Beginning of the assessment year 2015-2016, the Net Income from a goods carriage or heavy goods vehicle shall be assumed to be Rs 7,500/month per vehicle.
  • There is no requirement to maintain the business’s books of accounts.
  • Such taxpayers have to pay 100% of the Advance Tax liability by the FY’s 15th of March.
  • There is no need to pay the quarterly June/September/December advance tax instalments.
  • No deductions or business expenses are permitted to be claimed from the presumptive income.

Eligibility Criteria: 

Under the scheme, to be eligible:

  • You must be a HUF/Individual/Company/Partnership firm.
  • In the business of hiring or leasing trucks.
  • At any time during the financial year, you should not own greater than 10 vehicles/goods carriages even if they are paid for in instalments or are under hire purchase agreements.

Also Read: Special Allowances in India- Taxation and Calculation 

Conclusion

We have just assessed the presumptive scheme of income tax available for taxpayers with income from a business, profession and in the business of goods carriage U/S 44AD of the Income Tax Act of 1961. Filing the ITR is always a task involving good planning and knowing your eligibility for deductions, allowances, expenses etc. well. 

More more information, check out the KhataBook app. Happy ITR filing!

FAQs

1. Should I pay advance tax if I have opted for the presumptive taxation scheme?

If you opt for the taxation under the presumptive scheme, you may not have to pay the quarterly advance tax. However, ensure that all advance taxes are paid before/on the 15th of March of the applicable FY or financial year. Note that taxes paid by the 31st of March are considered to be advance taxes.

2. When are professionals or people in business subjected to a tax audit?

Under the 1961 Income Tax Act, a businessman is liable to a tax audit if the business’s total turnover is greater than Rs 1 Crore. A professional is responsible for a tax audit when the gross receipts from his profession exceed Rs 25 lakhs.

3. What is the due date for professionals and businessmen to file income tax returns?

Under the 1961 Income Tax Act, an individual who is a professional or carries out a business should file the income tax returns or ITR before/ on the 31st of July of a particular assessment year. If their accounts are subject to a tax audit, then the ITR should be filed before/on the 30th of September of the financial or assessment year. These dates are applicable normally unless the CBDT or Central Board of Direct Taxes extends the due dates by an official announcement.

4. Should a person with presumptive income maintain account books?

No. An individual taxpayer with a presumptive income does not need to maintain account books U/S 44AD, 44AE, 44ADA, etc., of the Income Tax Act of 1961.

5. I have an average annual turnover of approximately 30 lakh pa from my small business. Should I maintain records?

Yes, you must maintain account books as your business turnover exceeds Rs 25 lakhs in any/all the 3 immediately preceding years. When account books are not maintained, you can attract a Rs 25,000 penalty.

6. Can a taxpayer under the presumptive tax scheme claim further gross income expenses?

No. Once a taxpayer declares the percentage of income from gross receipts, he cannot claim any further deductions or expenses.

7. What are the deductions for business expenses allowable to small businesses? 

Firstly, no deductions are allowed as business expenses from the net income, including depreciation. The exception is that the partner’s remuneration and interest paid to them in partnership business or firm is allowable as a special deduction. However, such deductions should be within the prescribed limits U/S 40(b). Besides, the WDV asset value or the written down asset value is considered as though depreciation has been allowed.

Here’s an example to understand this better. Raj owns a Kirana shop and the gross business receipts are Rs 80, 20, 590. He has opted for the presumptive scheme of taxation U/S 44AD. He wants to claim depreciation on a large freezer unit and a billing system bought for Rs 4,50,500. He also has spent Rs 2,50,000 on renovating the goods racks. U/S 44AD, he opted for the net presumptive income which is 8% of the gross receipts (assuming these are cash receipts) or Rs 6,41, 648. This is payable as advance tax. If he has not opted for the presumptive taxation scheme, no deductions are allowable from the income. Hence, Raj cannot deduct depreciation on the freezer or the purchases of racks as expenses deductible from the net income.

8. What happens if the taxpayer declares a lower or higher percentage as presumptive tax?

The taxpayer can declare a higher percentage of income or gross receipts and pay taxes on it. If they declare an income percentage lesser than the prescribed 8% of the gross receipts, they will have to maintain accounts books and have them audited.  

9. If the presumptive tax scheme doesn’t work for me, can I opt out?

Once you opt for the presumptive tax scheme, you have to stay in it for 5 years. If you opt out, let’s say for 1 of the 5 years, you cannot opt back in for 5 years from when you opted out. For example, assume for the AY 2016-17, a taxpayer claims presumptive taxation U/S 44AD and offers ITRs with presumptive income from 2017-18 and 2018-19. However, in the AY 2019-20, he fails to opt for presumptive income taxation. Such a taxpayer is not eligible to claim under the presumptive taxation scheme for the following 5 assessment years or from AYs 2020-2021 to 2024-2025.

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