All about Presumptive Taxation in India

Written by : Knowledge Centre Team

2024-08-02

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Running a small business or your professional services requires you to do a lot more than just run a business. You can call presumptive taxation a shot in the arm in your tight schedule, as it helps you save a lot of time and effort.

However, like all great things, there is some catch. Section 44D of Indian Income Tax Act defines the rules of presumptive taxation.

Benefit & Catch

Presumptive taxation allows you to pay your tax based on presumptive income. Meaning, you don’t really need to estimate your income by deducting your expenses from revenue. You can simply take a percentage of your total revenue and pay tax on that.

Although, not having to maintain books of account could be one of the benefits of presumptive taxation. However, it’s not that straightforward, as you would still want to know your actual gain or loss in the activity.

This is also a limiting factor as if you opt for presumptive taxation; you cannot claim expenses and deductions from your revenue.

So, the benefit is more like, you may not have to submit the bills and financial statements while filing your taxes. But, you still need to maintain the accounts as a good businessperson. We will see why later in this article.

The Taxpaying Entity

The rules of presumptive taxation differ for different tax-paying entities. The two major classifications are businesses and individual professionals. Individual professionals have been further divided into two sections:

Individuals involved in specified professions
Individuals involved in other than specified (non-specified) professions

Legal Entities	Individual Professionals
• Sole Proprietorship	• Engineering
• Limited Liability Partnership (LLP)	• Legal
• Private Company	• Architecture & related
• Public Company	• Accountant
• Accountant	• Medical
	• Technical consultant
	• Interior designers

Individuals involved in providing professional services other than the ones listed above will need to use the rules for non-specified professions.

When can you opt for presumptive taxation?

You can only opt for presumptive taxation if your turnover doesn’t exceed the following limits:

Business Taxpayers: Rs. 2 crores
Professionals: Rs. 50 Lakhs

Exclusions for Presumptive Taxation:

Presumptive taxation rules apply to almost all the professions and businesses which meet the turnover criteria. However, few businesses are excluded from using the presumptive taxation mode of calculating tax liabilities:

Life insurance agency
Commission agency of any kind
The business of operating, hiring or leasing goods transports

What Are the Rates for Presumptive Taxation?

In case of business tax payors rates of taxable income consideration depend on the type of receipt:

1) Consideration for cash receipts is 8% of the total amount received

2) For digital (non-cash) payments, the rate would be 6%

For example, if your business had total revenue of Rs. 1 crore in the previous year, and your cash receipts total up to Rs. 30 lakhs, your taxable income under presumptive tax rules will be Rs. 6.6 lakhs (2.4 + 4.2 lakhs).

If you are a professional opting for presumptive taxation, you can estimate your tax liability on 50% of your total revenue.

Presumptive Tax vs. Expense Books

Here’s why you should maintain your accounting books religiously even if you are opting for presumptive taxation.

Presumptive taxation is only one of the two options to save your efforts in estimating your taxable income and navigating the deductions maze
You should know whether the presumptive route is beneficial for you

Consider the following example:

You are a specified professional and had a revenue of Rs. 20 lakhs in the PY 2019-20
You estimate that your total eligible business expenses amount to Rs. 11 lakhs
Presumptive taxation may not be the best option for you as your taxable income would be lower under the normal route

Rule of Thumb: If your eligible expenses in your profession exceed 50% of your revenue use the normal route. But, of course, to know if your eligible expenses exceed the limit your books have to be in order.

Rules for Mandatory Accounting & Financial Statements

Taxation rules mandate maintaining necessary accounting books for the businesses and professionals which meet any of the following criteria for income and turnover.

The limits apply to the amounts in any of the three immediately preceding financial years:

	Business	Specified Professionals	Non-Specified Professionals
Income	1.2 Lakhs		2.5 Lakhs
Total Sales / Gross Revenue / Receipts	12 Lakhs	1.5 Lakhs	25 Lakhs

For example, if you are filing the return for Financial Year 2019-20, your turnover or gross receipts for the FY 2018-19, 2017-18 and 2016-17 would also count.

Specific Books Professionals Must Maintain (Rule 6F)

In case you are a professional, whose gross revenue meets the criteria above, you will need to maintain the following books of accounts under Income Tax Laws. When you file your tax returns, you will need to submit these books for the correct assessment of your tax.

1. Cashbook

2. Journal

3. Ledger

4. Copies of all Bills & Receipts valued more than Rs. 25

5. Original bills for transactions valued more than Rs. 50

6. Medical professionals need to maintain the following two additional books:

Daily dated case register with patient details, fees and service provided
Daily stock details of medicines and consumable items

Due Dates for Filing Returns:

Due dates for filing your returns would depend on the applicability of tax-audit on your business or profession. Your business or profession is liable to get the books audited for tax and file a tax audit report under the following circumstances:

Business Taxpayer: If your total revenue is more than Rs. 1 crore in a financial year
Professionals: When the gross revenue is more than Rs. 25 lakhs in a financial year

Due dates for returns with and without tax-audit reports are as follows:

31st July of the Assessment Year (AY) for non-audited returns
30th September of the AY for audited returns and tax-audit report

Which ITR Forms to Use?

	Professionals
Normal Tax Return	ITR 3
If opting for Presumptive Taxation	ITR 4
Tax Audit Report	Form 3CD

Presumptive taxation scheme is a good initiative to reduce your burden of tax processing and filing. This rule gives you an option to reduce your tax liabilities even when your business expenses are low.

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