Presumptive Taxation

How Presumptive Taxation Works

Under the presumptive taxation scheme, taxpayers are not required to calculate actual expenses or maintain comprehensive financial records. Instead, they can declare a specified percentage of their turnover as taxable income. The Income Tax Bill 2025 has clarified that taxpayers must declare the higher of the presumptive income or actual profit earned in the financial year.

Example of Presumptive Taxation

Business Example: A business has a turnover of ₹1.5 crore (₹1 crore through digital transactions and ₹50 lakh in cash).

• Presumptive Income = (6% of ₹1 crore) + (8% of ₹50 lakh)

• Presumptive Income = ₹6 lakh + ₹4 lakh = ₹10 lakh

If the actual profit for the year is ₹15 lakh, the taxpayer must declare ₹15 lakh as taxable income, as it is higher than the presumptive income.

Professional Example: A doctor with gross receipts of ₹60 lakh under Section 44ADA.

• Presumptive Income = 50% of ₹60 lakh = ₹30 lakh

If the actual profit is ₹40 lakh, the taxable income will be ₹40 lakh, as it is higher than the presumptive amount.

Key Components of Presumptive Taxation

• Eligibility:

  • Businesses with turnover up to ₹3 crore if at least 95 percent of receipts are digital; otherwise, the limit is ₹2 crore.

  • Professionals with gross receipts up to ₹75 lakh.

• Taxable Income:

  • Businesses: 6 percent of digital turnover and 8 percent of non-digital turnover.

  • Professionals: 50 percent of gross receipts.

• Five-Year Lock-in:

  • Taxpayers opting for the scheme must continue for 5 years. Opting out leads to a 5-year bar from rejoining.

• No Deductions:

  • You cannot claim any more deductions for expenses. The declared percentage covers all business costs.

• Compliance:

  • If actual profit exceeds the presumptive income, the higher amount must be declared as taxable income.

Benefits of Presumptive Taxation

• Simplified Compliance: You don't need to keep detailed financial records or create complex financial statements.

• Reduced Litigation: Clear guidelines minimise disputes with tax authorities.

• Encourages Digital Transactions: Higher turnover limits apply to businesses with digital receipts.

• Lower Administrative Burden: Ideal for small businesses and professionals with limited accounting resources.

Challenges and Considerations

• Higher Tax Liability: If the actual profit exceeds the presumptive income, the taxpayer must pay tax on the higher amount.

• Five-Year Lock-in: Once the scheme is opted for, the taxpayer must follow it for 5 years. Exiting early bars re-entry for the next 5 years.

• No Expense Deductions: No further claims for expenses can be made beyond the declared percentage, potentially increasing tax liability for businesses with high operational costs.

• Exclusions: Certain businesses, such as those involved in leasing or hiring goods carriages, are not eligible under the scheme.

Conclusion

Presumptive taxation helps small businesses and professionals with tax compliance. It cuts down on paperwork and reduces disputes with tax authorities. However, this scheme may not fit all businesses. It’s especially tricky for those with high costs or changing income. Businesses should carefully consider their actual profits and turnover to see if this scheme is a good financial choice.