What is presumptive taxation scheme? Who can opt for it?

Income Tax Income from Business or Profession
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The “Presumptive Taxation Scheme” calculates your income on a presumptive basis, meaning it’s based on a presumption or probability. This scheme was introduced to help small businesses and professionals. So, how does it work?

Well, when you run a business or carry out a profession, you must maintain an account of all the payments you receive and the expenses you incur.

For example, if you run a small home bakery, you need to record the payments you receive for your orders, the money spent on raw materials, and even the delivery charges. This helps you calculate your net income and pay taxes on your profits. Additionally, you are required to maintain books of accounts like your P&L statement, balance sheet, etc., as required by the income tax department.

However, when you’re just starting out, you want to focus more on growing your business. To help with this, the government introduced the presumptive taxation scheme.

It basically says that if your annual turnover is within certain limits, you can report a fixed percentage as your profit and the government will assume the rest were expenses.

Now there are two sections that define the prerequisites of this scheme: 44AD for businesses and 44ADA for professionals.

Presumptive taxation for businesses (Section 44AD)

You can opt for the presumptive taxation scheme for businesses if you meet these conditions:

  • You must be a resident individual, HUF or partnership firm (excluding LLPs).
  • The gross sales or turnover of the business should be less than or equal to ₹3 crore.
  • You should report at least 6% (digital transactions) or 8% (non-digital transactions) of your gross sales/turnover as income.

For instance, if your total sales are ₹1 crore, you need to report at least ₹6 lakh as your profit and pay taxes on that amount. Moreover, if you have accounts of your business showing your actual profits are higher, you need to report the actual number.

Presumptive taxation for professionals (Section 44ADA)

For professionals, these are the conditions:

  • You must be a resident individual or partnership firm (excluding LLPs).
  • The gross receipts of the profession should be less than or equal to ₹75 lakh.
  • You should report 50% or more of the gross receipts as income.

What if I opt out of presumptive taxation scheme?

For businesses, you must continue with the presumptive taxation scheme for the next 5 financial years once opted in. If you opt out, you can’t go back to the presumptive scheme for the next 5 years and will need to get a tax audit during this period.

On the other hand, for professionals, if you want to report less than 50% of your revenue as profits, you must opt out of the scheme and maintain books of accounts. Further, if your total income exceeds the basic exemption limit (₹2.5 lakh), you are required to get a tax audit done.

What are the tax rates?

While the presumptive taxation scheme allows you to report a fixed percentage of your revenue as income, the taxation remains similar to how a normal business or professional is taxed, i.e., as per slab rates. If you have other sources of income, they will be added to your business/professional income and the total income will be taxed based on your applicable slab rate.

Which ITR form should you file?

If you opt for the presumptive taxation scheme, you can file ITR-4. However, if your total income exceeds ₹50 lakh or if you have capital gains, you’ll need to file ITR-3. You can still report your business/professional income as presumptive income in ITR-3.

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I am a practicing doctor, majority of my receipts are in cash but my gross receipts are less than Rs. 50 lakhs. Can I opt this presumptive taxation scheme?

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Hi @Swapnil_Agarwal,

The condition of cash receipts not exceeding 5% of the gross receipts is applicable only on the enhanced limits of ₹75 Lakhs, so you can opt for presumptive taxation scheme even if your cash receipts exceeds 5% of the gross receipts with total receipts not exceeding ₹50 lakhs.

Hope this helps!!

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Hello Niyati, I am working as freelancer for a foreign client. My income would be 60L approximately. Since the income exceeds the limit of 50L but less than 75L can I still opt for sec 44ADA? I have no other source of income.

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Hi @Ishwar,

Yes, you can opt for Sec 44ADA as your income is less than ₹75 Lakhs. The enhanced limits are applicable for the FY 2023-24. Also you will have to check that your cash receipts don’t exceed 5% of the gross income from Freelancing.

Hope this helps!!

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Thanks for your reply. I don’t earn any money in form of cash.

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Hi @Ishwar,

Since you won’t be earning any money in form of cash you can opt for Sec 44ADA

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Hi @CA_Niyati_Mistry. Thank you so much for your time.

I successfully filed my taxes under 44ADA for AY 22-23. I want to file my tax for AY23-24 now. I have two major questions.

  1. For AY23-25, do I have to pay advance tax (100% of my total tax) by 15th March 2023 or 2024? Which year?
  2. If I have to pay it by 15th March 2023, I should go to the income tax website and pay advance tax for AY23-24. But I distinctly remember that for AY22-23, I could file my tax from the normal File Income Tax section where I could select section ADA and fill my information and the website would calculate my tax for me. But when opting for advance tax this year I do not see any such options.

Cleartax has this to say.

Further, anyone opting for this scheme is not bound by the mandate of maintaining books of accounts too. While he is also liable to file his return by 31 July of the assessment year, he must file his return in ITR 4.

They say I have to file it by 31st July 2024. What am I missing? Again thank you for your time!

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@CA_Niyati_Mistry I have a thread about this topic here now.

On further research I realised I misunderstood quite a few things.

Please correct me if I’m wrong!

Income tax filing and Advance payment are completely different things. You pay advance tax before 15th March of the financial year and then file your income tax returns in the Assessment year.

Okay it makes sense now. I will make the following assumptions for my timeline. Please let me know if I am correct.

  1. For my FY22-23 income, I should go to the income tax website and pay my estimated advanced tax for the income I earned between 1st April 2022 and 31st March 2023 under AY23-24. Because I’m eligible for 44ADA, I have the benefit of paying it all in one go before March 15th 2023 instead of paying it in instalments.

  2. Then before 31st July 2023, I will have to file my income tax return. Neutral case - I won’t have to pay anything when filing my ITR because my estimated advanced tax payment was correct. Worst case - I have to file any difference and pay some more. Best case, my advance tax payment was more and I get a refund.

Are the dates mentioned correct? Are my assumptions right? Thanks again for your time.

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Hi @Vivek_Negi,

Yes, the dates mentioned and the assumptions are correct. Income Tax Return filing and Advance Tax payment are two different concepts. While you file ITR after the PY 2022-23 ends till 31st July, Advance tax is the tax liability that you pay before the year ends. In case of 44ADA only one installment of Advance tax is applicable i.e 15th March where you pay the entire estimated tax liability in one go.

At the time of return filing the income will be calculated again and thus tax liability might differ from what you had determined earlier at the time of Advance tax payment. In case you have paid excess Advance Tax you will receive refund and in case of deficiency you will have to pay tax along with interest.

Hope this clarifies!

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so . whether i opt for presumptive or non-presumptive ; advance tax has to be paid as pet the % slabs and as per the dates ! am i right ?

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Hi @HIREiN

Advance tax is to be paid if the estimated tax liability exceeds ₹10,000 in a financial year, irrespective of whether presumptive taxation is opted for or not.

Hope this helps.

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Hi

I work for a foreign client and approximate total invoicing would be for around 1.2Cr

Is it wise to work as an individual or form an entity?

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Hi @ankurs,

44AD/ADA can only be opted by Individuals, HUF and Partnership firm (other than LLP). If you wish to continue opting 44AD/ADA, to work as an Individual would be wiser.

Hope this helps!

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Hi thank you for the detailed explanation.

I am a freelance software developer with income 30L in FY22-23

My professional expenses are 10L

Can I opt for this scheme? What would be taxable amount in that case?

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Yes, you can opt for the presumptive scheme, the taxability would be implied on ₹20 Lakhs at slab rates.

Hope this helps.

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Hey @CA_Niyati_Mistry
Thank you very much for your detailed explanation about PTS.

I would really appreciate if you take time to solve my query.

I am a freelancer and I am earning money from international clients only.
My yearly turnover is around 30L. I do website designing, software dev. and digital marketing.
I do outsource some of my work to local freelancers.

I have been filing ITR for over 3 years under 44AD and I am selecting 21008 (Other service n.e.c.)
I am showing profit of around 10% (actual may be between 20-40%) of my turnover and so I am not paying tax as my income is below 5L.

My questions to you is

  1. Can IT Dept. ask to explain about my expense which is 90% of my turnover?
  2. Is it OK to pay local freelancers in cash (I always pay up to 10K INR max)?
  3. I am having GST and had filed LUT and so I am paying 0 GST. Does GST dept. ask for FIRC doc?
  4. What else can be shown to GST dept. in case I need to prove that the income I received had been sent by foreign client?
  5. Is it ok to choose 21008 (Other service n.e.c.) under 44AD? If not what should be code under 44AD?

Thank you very much in advance.

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What if in future my income exceeds 75L then can I file tax under section 44AD?

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Hi @love4u_now,

The answer to your questions are as follows:

  1. Generally IT Dept will not ask you to explain the 90% of your expenses. But in case they do you can take references from Case Laws where it was held that if the taxpayer has opted for 44AD/ADA he is not required to maintain books of accounts nor the IT Dept shall ask for the same.
  2. It is always advisable to pay business related expenses through banking channels.
  3. Since you’ve filed LUT and you are not paying any GST, the Dept may ask for FIRC document to make sure if you have received the export proceeds in time.
  4. You can show the Purchase order details or any contract if you have entered into with the Foreign clients for providing Freelancing services. Also you can show the bank statement in which the payment is received.
  5. Ideally, you are a Freelancer which means you are providing services as professional. Section 44ADA is for professionals those provide services where you have to declare 50% of your total receipts or actual profits whichever is higher as your income and calculate tax accordingly. Also the code selected is correct but the section 44AD is not correct.

Hope this helps!

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Hi @Ishwar,

In future if your income exceeds ₹75 Lakhs then you cannot file tax return under section 44ADA. Then it will be treated as Regular business income where calculations will be made for profits by deducting purchases and expenses from your sales.

Also, if you opt out of the Presumptive Taxation Scheme, you can not opt for the same for the next 5 Financial years.

Hope this helps!