INDEX
Presumptive Taxation for Business
Presumptive Taxation for Professionals
Key benefits for Business & Professionals
- Tax Audit & Complaince
Presumptive Taxation for Business and Profession
Updated Limits for Presumptive Taxation
The Budget 2023 has revised the turnover limits for presumptive taxation under Sections 44AD and 44ADA of the Income Tax Act, effective FY 2023-24 (AY 2024-25).
| Category | Previous Limit | Revised Limit |
|---|---|---|
| Sec 44AD (Small businesses) | Rs. 2 crore | Rs. 3 crore |
| Sec 44ADA (Professionals) | Rs. 50 lakh | Rs. 75 lakh |
These limits apply only if cash receipts do not exceed 5% of total receipts.
1. Businesses
Presumptive Taxation under Section 44AD
Section 44AD applies to businesses with a turnover of up to Rs. 3 crore (as per the 2023 amendments). The section allows small businesses to declare income at a presumptive rate of 8% of the total turnover or gross receipts.
However, there is a distinction based on the mode of payment:
- 8% applies to cash receipts.
- 6% applies to receipts through digital means (like bank transfers, digital wallets, etc.).
This ensures that businesses engaging in digital transactions benefit from a reduced tax rate, encouraging digital payments.
Eligibility Criteria:
- The turnover of the business should not exceed Rs. 3 crore.
- At least 95% of the total receipts should be through non-cash transactions (e.g., bank transfers, digital payments) for the taxpayer to avail of the 6% presumptive tax rate.
Example:
Suppose a business, “XYZ Traders,” has a turnover of Rs. 1.5 crore. Out of this, Rs. 70 lakh is received in cash, and Rs. 80 lakh is received through digital payments. The taxable income can be computed as:
- Income from cash receipts: Rs. 70,00,000 × 8% = Rs. 5,60,000
- Income from digital receipts: Rs. 80,00,000 × 6% = Rs. 4,80,000
- Total taxable income: Rs. 10,40,000
The key benefit of Section 44AD is that businesses do not need to maintain detailed books of accounts. Furthermore, businesses with turnover above Rs. 10 crore (or Rs. 1 crore if cash receipts exceed 5% of total receipts) must undergo a tax audit.
2. Professionals
Presumptive Taxation under Section 44ADA
Section 44ADA applies to professionals, such as doctors, lawyers, architects, and accountants, with gross receipts up to Rs. 75 lakh. Under this section, 50% of the total receipts are considered as taxable income, and no further expenses need to be itemized or substantiated.
For instance, if a doctor earns Rs. 30 lakh in a year, he can declare 50% of it, i.e., Rs. 15 lakh, as taxable income. This simplifies the entire process for professionals, who may otherwise need to maintain detailed records of their expenses.
Eligibility Criteria:
- The gross receipts or turnover of the professional should not exceed Rs. 75 lakh.
- No need to maintain detailed books of accounts or undergo a tax audit, making compliance easier.
Example:
A freelance architect named “Rakesh” has gross receipts of Rs. 30 lakh. Under Section 44ADA, he can declare 50% of his income as taxable, i.e., Rs. 15 lakh, instead of maintaining detailed records for every expense.
3. Key Benefits of Presumptive Taxation
Simplified Tax Filing: Presumptive taxation allows small businesses and professionals to declare a fixed percentage of their income, reducing the complexity of tax filing.
Exemption from Maintaining Books of Accounts: Under Sections 44AD and 44ADA, eligible taxpayers are not required to maintain detailed books of accounts, making compliance much simpler.
No Tax Audit for Eligible Taxpayers: For businesses or professionals opting for presumptive taxation, there is no need for a tax audit, provided they meet the eligibility criteria. This eliminates the need for costly and time-consuming audits unless the business turnover exceeds the prescribed limits.
Encourages Digital Payments: Section 44AD provides a lower tax rate of 6% for businesses that receive payments through digital means, incentivizing the use of cashless transactions and promoting transparency.
Advance Tax Payments: Taxpayers under the presumptive taxation scheme can pay their taxes in installments, based on the estimated income, which improves cash flow management.
Reduction in Compliance Burden: The ease of calculating taxes and avoiding detailed record-keeping helps taxpayers save time, money, and effort.
4. Tax Audit and Compliance
Under Section 44AD, if a business’s turnover exceeds Rs. 3 crore, or if cash receipts exceed 5% of the total receipts, the business will be required to undergo a tax audit under Section 44AB. The audit threshold increases to Rs. 10 crore if cash receipts and payments do not exceed 5% of total receipts and payments.
Similarly, under Section 44ADA, professionals must undergo a tax audit if their gross receipts exceed Rs. 75 lakh or if their income is less than 50% of gross receipts in the financial year.