- 15-Apr-2025
- Healthcare and Medical Malpractice
The Presumptive Taxation Scheme under Section 44AD of the Income Tax Act is designed to simplify the tax compliance process for small businesses, particularly those with a turnover below a specified limit. This scheme allows businesses to pay tax on a presumptive basis, making the tax process less cumbersome and helping businesses save time and resources.
Under the presumptive taxation scheme, small businesses are not required to maintain detailed accounting records or undergo an audit. Instead of calculating the actual profits, a fixed percentage of the turnover is deemed to be the income, making tax filing easier and less time-consuming.
For businesses with a turnover up to ₹2 crore (under Section 44AD), only 6% (for digital transactions) or 8% (for other transactions) of the total turnover is considered as taxable income.
Small businesses under this scheme do not need to maintain complex accounting books. The tax is calculated based on a presumed profit margin, which reduces the administrative burden. This is particularly beneficial for small businesses with limited resources for accounting.
Example: A small retailer with a turnover of ₹50 lakh can directly calculate their taxable income by applying the 8% presumptive profit on their turnover, rather than calculating the actual profits through detailed bookkeeping.
Typically, businesses with turnover above ₹1 crore are required to undergo a tax audit. However, businesses under the presumptive taxation scheme with a turnover up to ₹2 crore are exempt from tax audits, saving both time and costs associated with the audit process.
This exemption also lowers the likelihood of discrepancies and disputes with tax authorities.
Since the scheme allows for a fixed percentage of turnover to be treated as income, many small businesses benefit from a lower taxable income compared to the actual profits. This can help reduce their overall tax liabilities, as the presumptive income may be lower than their actual profits.
The scheme allows businesses to reduce the complexity of tax filing while still ensuring that they pay a fair share of tax based on their turnover.
The Presumptive Taxation Scheme simplifies the process of tax payments, helping businesses better manage their cash flows. With the tax being calculated on a fixed percentage of turnover, businesses can more easily plan for their tax obligations and avoid surprises at the end of the year.
Example: A small business owner can predict their annual tax liability more accurately based on their expected turnover, helping them plan for payments throughout the year.
By offering a simple method for calculating tax liabilities, the presumptive taxation scheme encourages small businesses to stay compliant with tax laws. Businesses are more likely to file their returns on time, reducing the risk of penalties and fines for late filing or non-compliance.
Under the presumptive taxation scheme, businesses that receive a significant portion of their turnover through digital transactions can benefit from a reduced rate of 6% for calculating their presumptive income. This incentivizes businesses to adopt digital payment methods, improving their cash flow, transparency, and business operations.
This also aligns with the government’s push for digital payments, which can reduce the risk of tax evasion.
The presumptive taxation scheme under Section 44AD is available for small businesses with a gross turnover or gross receipts of up to ₹2 crore during the financial year.
The scheme applies to resident individuals, Hindu Undivided Families (HUFs), and sole proprietorships who are engaged in business and not earning income from profession (i.e., income from the profession is not covered under the scheme).
The scheme is available for businesses that do not have income from capital gains or income from speculation business.
Businesses with a turnover of up to ₹2 crore can calculate their tax based on 8% of the total turnover (or 6% for turnover from digital payments). This is considered the presumptive income.
The profit margin percentage may vary if the business has more than 50% of its turnover from digital payments, providing an additional incentive to go digital.
Small businesses opting for this scheme are not required to maintain detailed books of accounts or have an audit, simplifying compliance and reducing administrative costs.
Example: A small business with a turnover of ₹75 lakh would apply the 8% rate to calculate their taxable income, which results in ₹6 lakh of taxable income without needing to maintain detailed accounts.
The scheme does not apply to businesses involved in professional services (such as legal, medical, engineering, or consultancy services) or businesses that involve income from capital gains, speculative transactions, or rental income.
If a business opts for the presumptive taxation scheme, they must continue with it for at least five consecutive years. However, after five years, the business can withdraw from the scheme if they wish, subject to certain conditions.
A small printing business with a turnover of ₹1.5 crore opts for the presumptive taxation scheme. They calculate their taxable income at 8% of ₹1.5 crore, which amounts to ₹12 lakh. This significantly simplifies the tax filing process, and they avoid the need for an audit. They also receive the benefit of reduced tax compliance costs and improved cash flow management.
Answer By Law4u Team
Discover clear and detailed answers to common questions about Taxation Law. Learn about procedures and more in straightforward language.
