Presumptive Income under section 44ada
Presumptive Income - Eligibility, rate and documents required
- What is Presumptive Income?
- Benefits of Presumptive Income Tax Scheme
- What Are the Presumptive Tax Threshold Limits?
- Conditions for Section 44AD
- Eligibility criteria for Presumptive Income
- Rate of Presumptive Tax under section 44ADA
- Required documents for filing Presumptive Income Tax
- Provision for Salaried Individuals
- FAQs
What is Presumptive Income?
The Presumptive Taxation System (PTS) bases income calculations on expected rather than actual income.The reason is that you deduct company costs from enterprise profits and pay balance tax. Let’s discuss this further, any corporation or business with a turnover of up to 1 crore may benefit from the presumptive scheme. Presumptive tax means that a person’s income is believed to be a certain amount regardless of their actual income.
Benefits of Presumptive Income Tax Scheme
Following are the main advantages of Presumptive Taxation for professionals:
Easy filing procedure
Compared to other ITR forms, the tax filing process is really quick and simple. Additionally, it decreases the chances of making any mistakes to a great extent since it saves a lot of time and energy.
Decrease in tax liability
In most cases, professionals do not need to declare substantial amounts of expenses. Nevertheless, one can save on taxes by declaring 50% of the earnings as a profit and the rest as expenses.
Scope of money-saving
Individuals file their own income tax returns because the process is simple and hassle-free.
As a result, people are no longer required to seek the advice of professional tax consultants.
A tax consultant can charge taxpayers from Rs. 5000 to Rs. 15000 for filing income taxes.
What Are the Presumptive Tax Threshold Limits?
Businesses can choose presumptive taxation for FY 2024-25 (AY 2025-26) if their turnover stays within the given limits.
Category | Cash receipts up to 5% of total turnover/receipts | Cash receipts more than 5% of total turnover/receipts |
Section 44AD (Small businesses) | Up to Rs. 3 crore | Up to Rs. 2 crore |
Section 44ADA (Professionals like doctors, lawyers, engineers, etc.) | Up to Rs. 75 lakh | Up to Rs. 50 lakh |
If you choose presumptive taxation, your profit is calculated as a fixed percentage of your turnover.
- Normally, profit is taken as 8 percent of the total turnover.
- However, if cash receipts are not more than 5 percent of total receipts and cash payments are also not more than 5 percent of total payments, then profit is calculated at 6 percent of the total turnover.
Conditions for Section 44AD
The government has introduced an important rule for taxpayers who choose the presumptive taxation scheme.
If you opt for presumptive income, you must continue with it for at least 5 years. If you do not, you will lose the benefit.
What is this new condition?
If you choose the presumptive taxation scheme, you must follow these rules:
- You have to declare income under the presumptive scheme continuously for 5 years.
- If you stop the scheme before completing 5 years and file income under the regular method using ITR 3, then you will not be allowed to use the presumptive scheme for the next 5 years.
Example:
Rohit opts for the presumptive taxation scheme in AY 2025 to 2026. This means he must continue using the scheme for the next 5 assessment years, from AY 2026 to 2027 up to AY 2031 to 2032.
If Rohit stops using the presumptive scheme in AY 2026 to 2027 and files regular business income instead, then he will not be eligible to opt for the presumptive scheme for the next 5 years, that is from AY 2027 to 2028 up to AY 2032 to 2033.
Important point to note:
The 5 year restriction period is counted from the year in which you first switch to regular taxation for that business.
The government has brought this rule to stop taxpayers from frequently switching between presumptive and regular taxation just to reduce tax liability.
So, once you choose the presumptive scheme, it is better to continue it for 5 years. If you exit early, you will be blocked from using the scheme again for the next 5 years.
Also, the turnover limit has been increased to Rs. 3 crore, provided cash receipts do not exceed 5 percent of the total turnover.
Eligibility criteria for Presumptive Income
- Businesses with an annual turnover of less than 2 crores and an income of more than 8%.
- Professionals and freelancers with gross receipts less than Rs 50 lakh per year whose income is set at 50% or more.
- Also for individuals with a special source of income.
Rate of Presumptive Tax under section 44ADA
During a given financial year, income covered under section 44ADA is 50% of gross earnings from a profession.
It is important to note that such a figure was calculated based on the assumption that professionals incur relatively low expenditures when compared to business owners
In addition, eligible professionals can declare expenses over 50% of their total receipts if necessary.
Required documents for filing Presumptive Income Tax
- Bank statements for the financial year
- Statements of income and expenses
- Gross Receipts
- Statement of Tax Credit on Form 26AS
- If the interest exceeds Rs. 10,000, a bank statement is necessary.
Provision for Salaried Individual
In order to generate additional income, salaried individuals often freelance.Â
In such cases, the gross income earned during a financial year is determined by adding the salary income with the earnings from freelancing activities. As a result, the total will be taxed according to their applicable tax slab rate.
For instance, if Raj earns a salary income of Rs.20 lakh and a freelance income of Rs.10 lakh, he can elect the presumptive taxation option.
Raj can only increase his overall salary by half what he makes as a freelancer.
His annual income will be Rs. 25 lakh if he does this. It must be mentioned that Raj must use ITR-4 to file income tax returns in this situation.
FAQs
You cannot do so. section 44AD favours only partnership firms that are not Limited Liability Partnerships.
if you wish to take benefit of the Presumptive Taxation Scheme, your turnover cannot exceed Rs. 1 crore.
No, you do not have to pay advance taxes if you are taking advantage of section 44AD.
The total turnover of the firms will be counted in this situation.
We have reached the end of our post on Presumptive Income Tax. Post your thoughts and opinions in the comments box below.
