Presumptive Taxation: benefits for self-employed individuals

18 April, 2023

Self-employed individuals earning money from a business or profession often find it hard to keep records of their cash flows. Since their monthly income is not consistent, calculating their tax liability becomes challenging. To simplify these processes and put an end to such hassles, the Indian Government provides a presumptive taxation scheme under Section 44AD, Section 44ADA, and Section 44AE.

Read on to learn more about this and how it can help simplify your tax concerns.

What is the presumptive taxation scheme?

As per the Income Tax Act 1961, all individuals engaged in a business or profession must maintain accounting records and have these accounts audited regularly. However, this can be a tiresome process and requires resources, such as time and money. The presumptive taxation scheme allows such taxpayers to declare their income at a prescribed rate. This implies they no longer have to maintain books of accounts and get their accounts audited.

The following categories of taxpayers can use presumptive taxation:

• Resident individuals

• Hindu Undivided Families (HUFs)

• Partnership firms, not including Limited Liability Partnerships (LLP)
  
  

Further, the following professions qualify for the presumptive taxation scheme under Section 44ADA:

• Legal

• Medical

• Engineering or architectural

• Accountancy

• Technical consultancy

• Interior decoration

• Any other profession notified by the Central Board of Direct Taxes (CBDT)
  
  

How is the income determined under the presumptive taxation scheme?

Under the presumptive taxation scheme, a person's income is calculated at 8% of the business's turnover or gross receipts for the concerned year according to the provisions of Section 44AD. Further, with effect from the assessment year 2017-18, the government reduced the estimated rate to 6% under Section 139 if the turnover/gross receipt of a business is received by the following modes during the previous year or before the due date of filing the income tax return:

• Account payee bank draft

• Account payee cheque 

• A bank account's electronic clearing system

• Other electronic modes
  
  

This was implemented to encourage digital transactions among small businesses.

It is important to note that professionals who wish to use the presumptive taxation scheme have to use Form ITR 3 for filing their IT returns. The return should be filed and submitted on or before July 31 of the concerned assessment year.

Tax benefits of the presumptive taxation scheme

Here are some tax benefits of using the presumptive taxation scheme:

• Individuals can claim a tax deduction for any donation made to the Prime Minister's National Relief Fund (PMNRF). 

• Individuals can claim a tax deduction for any donation made to the National Defence Fund (NDF).

• Paying advance tax is far simpler under presumptive taxation. Taxpayers can pay their advance tax at once before March 31 of the concerned year instead of estimating the future income and paying tax each quarter. For those who expect their income to be more than ₹ 10,000 in a financial year, the advance tax must be paid by March 15.
  
  

Other benefits of the presumptive taxation scheme

• Simplified process: Filing the tax return is simpler under presumptive taxation as the time spent is less. Overall, the presumptive taxation scheme is a practical and efficient option for those looking to streamline their taxes quickly.
  
  

• Reduced costs: Filing an income tax return can be costly in complex cases. Taxpayers may need to hire a chartered account or tax professional for assistance. However, the presumptive taxation scheme is straightforward and can be done by taxpayers. There is no need to hire a third party, which can save a fair amount.
  
  

• No need for keeping books of accounts: The presumptive taxation scheme eliminates the need to maintain books of accounts and conduct regular audits. This reduces the compliance burden. Further, it helps taxpayers save time and money and use these savings for their business or profession.
  
  

• Boon for small businesses: The presumptive taxation scheme is particularly helpful for small businesses that may not have the time and resources to audit books and maintain accounting records. Moreover, the Government of India offers concessions on digital payments. Small businesses can truly benefit from such provisions and save money.
  
  

The presumptive taxation scheme in India is a valuable tool for small businesses and professionals looking to simplify their tax filing process. The scheme provides several advantages, including reduced compliance burden, simplified return filing process, no need for audit, and lower tax liability. Additionally, the presumptive scheme is specifically tailored to small businesses and professionals with an annual turnover of up to ₹ 2 crores.

HDFC Bank adds another layer of convenience by offering the option to pay various taxes via an HDFC NetBanking account. This eliminates long queues, extended wait times etc. Customers can also file ITR and verify it through NetBanking, ensuring complete ease when managing taxes.

Learn More About Filing Income Tax Returns Here.

Click Here To Login Into HDFC Bank NetBanking Account!

​​​​​​​*Terms and conditions apply. The information provided in this article is generic in nature and for informational purposes only. It is not a substitute for specific advice in your own circumstances. You are recommended to obtain specific professional advice from before you take any/refrain from any action. Tax benefits are subject to changes in tax laws. Please contact your tax consultant for an exact calculation of your tax liabilities.