Running a small business or offering professional services entails a multitude of responsibilities beyond just managing the operations. Presumptive taxation is a valuable asset within your busy schedule, as it offers significant time and effort savings. Nevertheless, as with most beneficial arrangements, there are certain conditions to consider. That is to say, Section 44D of the Indian Income Tax Act outlines the guidelines for presumptive taxation.
In other words, presumptive tax empowers you to calculate your tax liability based on a presumed income level. In essence, you don’t have to compute your income by subtracting expenses from your revenue. Instead, you can simply apply a predetermined percentage to your total revenue and remit taxes accordingly.
Keep reading below to learn more about presumptive taxation for business in detail.
What is Presumptive Taxation?
What is presumptive tax? Presumptive taxation offers a streamlined approach to tax calculation, specifically tailored for small businesses and self-employed individuals. Its primary aim is to alleviate the tax burdens on these entities by reducing the complexities associated with tax compliance.
Moreover, within the presumptive taxation framework, businesses’ taxes depend on an assumed income level rather than the actual profits they generate. This taxation method operates on the premise that businesses in certain sectors can have a minimum income level, serving as a foundation for tax calculations.
Presumptive taxation is beneficial for small businesses and self-employed individuals. They often have limited resources and may struggle to maintain comprehensive financial records. In many instances, these individuals and businesses need access to professional accounting and tax services commonly utilised by larger organisations.
Who Can Apply for Presumptive Taxation U/S 44AE?
Any Hindu Undivided Family (HUF) or partnership firm (excluding LLP) that holds tax residency in India has the option to choose presumptive taxation applicable to businesses. Likewise, any individual or partnership firm (excluding LLP) with tax residency in India can opt for presumptive taxation tailored for professional income.
Who Is Eligible for Presumptive Taxation U/S 44ADA?
Individuals residing in India involved in the following professions qualify for presumptive taxation:
- Legal
- Medical
- Engineering
- Architecture
- Accountancy
- Technical consultancy
- Interior Decoration
- Other professions notified by CBDT
Whose total gross receipts or turnover within the fiscal year do not surpass Rs. 50 lakh.
Factors To Consider Before Filing a Presumptive Taxation
So, now you what is presumptive tax scheme. Experts recommend considering the following considerations before choosing presumptive taxation:
- If you are operating a business and decide to opt for presumptive taxes, you must commit to this method for a continuous period of 5 years.
- Taxpayers must declare their profits at a fixed percentage. So, it should be at least 8% or 6%, depending on the nature of business receipts and their timing. For professions, the profit declaration should be at least 50%.
Characteristics of the Scheme u/s 44AE:
- Under section 44AA, a taxpayer may not uphold financial records.
- The business turnover should remain below INR 2 Crore (INR 1 Crore up to FY 2015-16).
- The net income from a heavy goods vehicle will be INR 7,500 per month for each vehicle.
- The taxpayer is ineligible to seek deductions for business expenditures against their income.
- Such a taxpayer must submit Form ITR 4 through the Income Tax website.
Benefits of Disclosing Income Under Presumptive Taxation Scheme
The advantages of presumptive tax include:
- There’s no requirement to maintain accounting records or conduct Income Tax audits as stipulated by section 44AA or 44AB, as applicable.
- Any individual who opts for the presumptive tax limit must settle the entire advance tax amount by March 15 of the preceding year. This means that they are exempt from making installment payments of advance tax on June 15, September 15, and December 15 of the previous year, as is the case for other taxpayers not covered by this scheme.
- One can submit Income tax returns (ITRs) using the simplified and shorter Form ITR-4 (Sugam).
- This reduces the burden of compliance and promotes a more business-friendly environment.
Can You Opt in and out of Section 44 AD?
As per presumptive tax meaning, if a taxpayer chooses the presumptive taxation scheme for a specific fiscal year, they must adhere to this scheme for the next five fiscal years. Nonetheless, suppose the taxpayer discontinues using the scheme for five consecutive years. In that case, they will be ineligible to choose the presumptive taxation scheme for five years starting from the year they opt out.
Can You Opt in and out of Section 44ADA?
The procedures and regulations for entering and exiting the presumptive taxation scheme, as stipulated by Section 44 ADA, are notably more flexible than Section 44AD. Furthermore, taxpayers have the liberty to choose to enter or exit the presumptive taxation scheme under Section 44ADA whenever they wish. Unlike Section 44AD, the five-year requirement does not bind taxpayers under this section.
Conclusion
The presumptive taxation scheme has bestowed numerous advantages upon small businesses and professionals who previously encountered difficulties in bookkeeping and consolidating their income tax returns. By curbing overall expenses, small businesses can allocate these funds toward fostering their professional development.
Furthermore, there exist additional tax-saving tactics that professionals can employ to diminish their tax liabilities, including market investments, insurance purchases, and more.
Presumptive Taxation FAQs
When can you opt for presumptive taxation?
Presumptive taxation can be a viable option as long as your turnover remains within the specified thresholds:
- For business taxpayers: Not exceeding Rs. 2 crores.
- For professionals: Not surpassing Rs. 50 lakhs.
Who is not eligible for presumptive taxation?
Certain businesses are ineligible for employing the presumptive taxation method to determine their tax obligations. These exclusions encompass:
- Life insurance agencies.
- Agencies dealing in various types of commissions.
- Enterprises engaged in the operation, rental, or leasing of goods transportation.
In which business 44AD is not applicable?
The regulations pertaining to the presumptive taxation scheme, are pertinent to qualifying assesses involved in any business. It excludes the business of operating, hiring, or leasing goods carriages as specified in Section 44AE.