The presumptive taxation scheme makes income tax compliance easier for small businesses, professionals, and freelancers by allowing them to declare income at a fixed percentage of turnover, without the need to maintain detailed books of accounts. Covered under Sections 44AD and 44ADA, this scheme lowers compliance burden, removes audit requirements in most cases, simplifies record-keeping, and enables smooth return filing while providing tax-saving benefits to eligible taxpayers.
Key Highlights
- Enables small businesses, professionals, and freelancers to declare income as a fixed percentage of turnover without maintaining detailed books of accounts.
- Once the scheme is chosen, it must be continued for five consecutive years; opting out earlier restricts re-entry for the next five years.
- Advance Tax: Under this scheme, the entire advance tax liability must be paid in one installment on or before 15th March of the financial year.
What is the Presumptive Taxation Scheme?
Freelancers, professionals, and business owners are required to report their income under the head Profits and Gains from Business or Profession in the Income Tax Return (ITR). Normally, tax is calculated after deducting allowable business expenses. To reduce compliance requirements, taxpayers may choose the presumptive taxation scheme under Section 44ADA (for professionals) or Section 44AD (for businesses), which removes the obligation to maintain detailed books of accounts. Under this scheme, income is declared as a specified percentage of total turnover.
What are Books of Accounts?
Books of accounts refer to records that capture all business income, expenses, assets, and liabilities. These financial records help assess the financial position and performance of a business. In certain situations, maintaining books of accounts becomes mandatory based on prescribed limits and the provisions of Section 44AA.
Applicability for Maintenance of Books of Accounts
For a business or profession, maintaining books of accounts becomes mandatory under the Income Tax Act if, in any of the three immediately preceding previous years, the turnover or income crosses the prescribed limits mentioned below.
Limits for Maintaining Books of Accounts
| Particulars | Business – Others | Business – Individuals/HUF | Profession |
|---|---|---|---|
| Turnover | ₹10,00,000 | ₹25,00,000 | ₹1,50,000 |
| Income | ₹1,20,000 | ₹2,50,000 | – |
If any of the above thresholds are exceeded, books of accounts must be maintained as per the provisions of the Act.
Prescribed Books of Accounts (Rule 6F)
The following accounting records are required to be maintained:
i. Cash Book – Records all cash receipts and payments, helping determine the cash balance at the end of the day or month.
ii. Journal – A record of day-to-day transactions showing all debits and credits, especially when following the mercantile system of accounting.
iii. Ledger – Contains accounts where journal entries are posted, making it easier to prepare financial statements at the end of the year.
iv. Bills and Receipts (Photocopies) – Photocopies of bills or receipts must be preserved if the value exceeds ₹25.
v. Bills and Receipts (Originals) – Original bills or receipts must be maintained if the value exceeds ₹50.
vi. Additional Records for Medical Professionals –
a. Daily case registers containing patient details, services rendered, fees received, and dates of receipt, or
b. Daily stock records of medicines and other consumable items.
Penalty for Non-Maintenance of Books of Accounts
Failure to maintain prescribed books of accounts may attract a penalty of up to ₹25,000 under Section 271A of the Income Tax Act.
Tax Audit
A tax audit involves the examination of books of accounts of a business or professional to verify income, expenses, taxes, and related transactions.
A tax audit becomes mandatory if turnover exceeds the following limits:
| Applicable Condition | Business | Profession |
|---|---|---|
| Cash receipts exceed 5% | ₹1 Crore | ₹50 Lakhs |
| Cash receipts up to 5% | ₹10 Crore | ₹75 Lakhs |
Return of Income
Taxpayers opting for the presumptive taxation scheme are required to file their return of income using ITR-4.
Due Dates for Return Filing
Key due dates to remember are:
- Filing of tax audit report: 30th September of the assessment year
- Return filing (where tax audit is applicable): 31st October of the assessment year
- Return filing (where tax audit is not applicable): 31st July of the assessment year
- Return filing (in case of international transactions): 30th November of the assessment year
Updated Due Dates
- Due date for filing tax audit report: 30th September of the assessment year
- Due date for return filing (tax audit applicable): 31st October of the assessment year
- Due date for return filing (tax audit not applicable): 15th September of the assessment year (extended due date for FY 2024–25)
Section I: Businesses
The presumptive taxation scheme is available only to the following entities:
- Individuals
- Hindu Undivided Families (HUFs)
- Partnership firms (excluding LLPs)
Example:
XYZ Ltd. has a turnover of ₹1.8 crores and wishes to opt for the presumptive taxation scheme. Can it do so? No. Since XYZ Ltd. is a company, it is not eligible to avail the benefits of the presumptive taxation scheme.
Presumptive Taxation for Businesses
Presumptive taxation for businesses is governed by Section 44AD of the Income Tax Act. Businesses whose turnover falls within the prescribed limits can choose this scheme under Section 44AD.
Turnover Limits for Applicability of Section 44AD
| Turnover Limit | Applicable Condition |
|---|---|
| ₹2 Crores | Where cash receipts exceed 5% of total receipts |
| ₹3 Crores | Where cash receipts are up to 5% of total receipts |
Businesses opting for presumptive taxation are required to declare profits at 8% of turnover or gross receipts for non-digital transactions, or 6% for digital transactions, as applicable.
Businesses Not Eligible for Presumptive Taxation
The following categories cannot opt for presumptive taxation under Section 44AD:
a. Life insurance agents
b. Income earned by way of commission or brokerage
c. Businesses engaged in plying, hiring, or leasing goods carriages (presumptive taxation for such businesses is covered under Section 44AE)
Computation of Income under Presumptive Taxation
Example:
Lalit Traders have gross receipts of ₹1.5 crores for FY 2023–24 and do not maintain books of accounts. They have opted for the presumptive taxation scheme. During the year, Lalit Traders received ₹70 lakhs through non-digital transactions (cash) and ₹80 lakhs through digital transactions.
Computation:
- Income from non-digital transactions: ₹70,00,000 × 8% = ₹5,60,000
- Income from digital transactions: ₹80,00,000 × 6% = ₹4,80,000
Total income under the head “Profits and Gains of Business or Profession” = ₹10,40,000
Section II: Professionals
Individuals engaged in the following specified professions are eligible to opt for presumptive taxation under Section 44ADA:
- Engineering
- Legal services
- Architecture
- Chartered Accountancy
- Medical profession
- Technical consultancy
- Interior decoration
Presumptive Taxation for Professionals
Presumptive taxation for professionals is governed by Section 44ADA of the Income Tax Act. Professionals whose gross receipts are within the prescribed limits can choose this scheme.
Applicability of Section 44ADA
| Turnover Limit | Applicable Condition |
|---|---|
| ₹50 Lakhs | If cash receipts exceed 5% of total receipts |
| ₹75 Lakhs | If cash receipts are up to 5% of total receipts |
Example
Rakesh is a practicing doctor with an annual income of ₹30 lakhs for FY 2022–23. His actual expenses for running the practice amount to ₹3,00,000. His tax liability under the New Tax Regime for FY 2024–25 is as follows:
| Particulars | With Presumptive Taxation | Without Presumptive Taxation |
|---|---|---|
| Income | ₹30,00,000 | ₹30,00,000 |
| Expenses | ₹15,00,000 (50% deemed deduction) | ₹3,00,000 |
| Taxable Income | ₹15,00,000 | ₹27,00,000 |
| Tax Liability | ₹1,40,000 (excluding cess) | ₹5,00,000 (excluding cess) |
From the above, it is clear that by opting for presumptive taxation, Rakesh can save ₹3,60,000 in taxes. He may achieve further benefits by choosing the new tax regime along with presumptive taxation.
Freelancers’ Income
Freelancers engaged in specified activities are governed by the same provisions applicable to other professionals. This includes rules related to computation of income, tax liability, maintenance of books of accounts, presumptive taxation, and return filing, whether they are specified or non-specified professionals.
Understanding the Link Between Section 194J and Section 44ADA
- Presumptive taxation under Section 44ADA is available only to professionals specified under Section 44AA.
- Other professionals such as freelancers and content creators may opt for presumptive taxation under Section 44AD.
- In recent cases, the Income Tax Department has issued notices to certain taxpayers opting for Section 44AD, suggesting that they should instead opt for Section 44ADA because TDS was deducted under Section 194J.
- However, Section 194J covers not only professional fees but also royalty, non-compete fees, and director’s remuneration.
- Mere deduction of TDS under Section 194J does not automatically require opting for Section 44ADA.
- If a taxpayer is not a specified professional under Section 44AA, they are still eligible to choose presumptive taxation under Section 44AD.
Points to Remember
There are two key aspects that anyone opting for presumptive taxation should be aware of:
- Once presumptive taxation is chosen, it must be followed for five consecutive years. If a taxpayer opts out during this period, they will not be eligible to re-enter the scheme for the next five years.
- Taxpayers opting for presumptive taxation must pay the entire advance tax liability in a single installment on or before 15th March of each financial year.
Benefits of Presumptive Taxation
- Under this scheme, taxable income is calculated as a fixed percentage of turnover, and tax is paid on that deemed income.
- There is no requirement to maintain detailed books of accounts.
- Tax audit is not mandatory.
- Although advance tax is applicable, taxpayers are not required to estimate and pay it quarterly. Instead, the full advance tax can be paid in one installment by 15th March of the relevant financial year, provided the expected tax liability exceeds ₹10,000.
Frequently Asked Questions (FAQs)
1. What is presumptive taxation?
Presumptive taxation is a simplified tax scheme under the Income Tax Act that allows eligible taxpayers to declare income at a prescribed rate without maintaining detailed books of accounts.
2. Who is eligible for presumptive taxation in India?
Resident individuals, Hindu Undivided Families (HUFs), and partnership firms (excluding LLPs) engaged in eligible businesses or professions can opt for presumptive taxation, subject to turnover limits.
3. Which sections cover presumptive taxation in India?
Presumptive taxation is covered under Sections 44AD, 44ADA, and 44AE of the Income Tax Act, depending on the type of business or profession.
4. What is Section 44AD?
Section 44AD applies to small businesses with turnover up to the prescribed limit, allowing them to declare income at a fixed percentage of total turnover.
5. What is Section 44ADA?
Section 44ADA applies to specified professionals such as doctors, lawyers, architects, and consultants, allowing them to declare 50% of gross receipts as taxable income.
6. What is Section 44AE?
Section 44AE applies to taxpayers engaged in the business of plying, hiring, or leasing goods carriages and allows income to be calculated on a per-vehicle basis.
7. What are the benefits of presumptive taxation?
Benefits include reduced compliance, no requirement to maintain detailed books, lower audit requirements, simplified tax calculation, and ease of filing returns.
8. Are books of accounts required under presumptive taxation?
Generally, books of accounts are not required if income is declared as per the presumptive rate. However, certain records may still be needed for business purposes.
9. Can taxpayers opt out of presumptive taxation?
Yes, taxpayers can opt out, but in the case of Section 44AD, they may be restricted from re-entering the scheme for a specified period if they exit voluntarily.
10. Is advance tax applicable under presumptive taxation?
Yes, advance tax is applicable, but under Sections 44AD and 44ADA, the entire advance tax liability can be paid in a single installment.
11. Can losses and deductions be claimed under presumptive taxation?
Most business expenses are presumed to be included in the declared income. However, deductions under Chapter VI-A, such as Section 80C, can still be claimed if applicable.
12. Is presumptive taxation suitable for all businesses and professionals?
Presumptive taxation is best suited for small businesses and professionals with stable margins. It may not be ideal for those with high expenses or losses.
