Presumptive Income Tax Filing for Business and Individuals

2024-08-02

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To make tax filing simpler for professionals and small businesses, the Indian Income Tax Department has introduced a taxation scheme. You are not required to maintain a book of accounts under this scheme. Your income is calculated on a presumptive basis if your yearly turnover is below a limit.

What is Presumptive Tax?

The Income-tax Act mandates professionals and businessmen to maintain regular books of accounts. Both categories have to get their accounts audited by CAs and accordingly file income-tax returns.

The presumptive tax was introduced to give relief to small taxpayers. If you choose presumptive tax to file the returns, you declare income at a prescribed rate. You don't have to do the tedious job of maintenance of books of accounts and the time-consuming auditing process.

There are multiple benefits of presumptive taxation for businesses and professionals. The important ones are as below:

No Maintenance and Auditing: You do not need to maintain account records. Also, there is no need to get your account audited.
Simple Net Income Calculation: Under Section 44AD, you calculate your net income as 8% of your total turnover and pay tax only on that income. For digital receipts (payments in non-cash), the net income is 6% of your receipts.
Advance Tax: You have to pay taxes by 15th March of a financial year if you expect your income tax liability will be more than Rs 10,000.

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Presumptive Taxation for Business

When you set up a business, it is not only about running the business. You need a lot more things to do. You need to look at and take care of different compliances.

One such compliance is to maintain books of account.

You have to maintain an accounts book if you meet any of the following criteria:

Your income is more than ₹ 1.2 lakh or
Your total sales, gross receipts, or turnover is more than ₹ 10 lakh in any of the three immediately preceding previous years.

Tax Audit

You are liable for tax audits if you have gross receipts of more than Rs 1 crore in a financial year. You need to file the tax audit reports by 30th September of the assessment year and have to file electronically via Form 3CD. Your audit report should be duly verified before submission, as a revision of a tax audit is not possible under normal circumstances.

Businesses Exempt from Presumptive Taxation

You can opt for a presumptive taxation scheme if your business meets the turnover criteria of less than ₹ 2 crore. But businesses listed below are excluded from presumptive taxation:

Businesses in the area of plying, hiring, or leasing goods carriages
Commissions of any kind

Presumptive Taxation Computation for Businesses

Assume your business had total revenue of ₹ 1.25 crore in FY 2024-25. You have cash receipts that sum to ₹ 75 lakh, and digital transactions accounted for ₹ 50 lakh. Your taxable income will be calculated as (8% of 75 lakh + 6% of 50 lakh) under the presumptive tax scheme. It amounts to ₹ 9 lakh.

Presumptive Taxation for Professionals

Below professions are included for presumptive taxation:

Engineering	Legal
Architectural profession	Accountant
Medical	Technical consultant
Interior decoration

Book Maintenance for Professionals

Under Rule 6F of the Income Tax Rules, professionals from the above professions need to maintain books of accounts. Professionals need to maintain the book for a year if:

Gross receipts exceed ₹ 1.2 lakh in any of the three immediately preceding years.
Started with a profession in a particular year, and the receipts exceed ₹ 1.2 lakh.

Below are accounting records prescribed under Rule 6F:

Type	Purpose
Cashbook	To record all the cash receipts and payments
Journal	To maintain day-to-day transactions
Ledger	For details of all the accounts to simplify the preparation of your financial statements
Other records	Bills or receipts more than ₹ 25 Original bills or receipts of value more than ₹ 50

Other Professions

Profession mentioned in the above table are required to maintain record without any monetary limit. In case of other profession, ₹ 1.2 lakh limit will apply.

Computation of Taxable Income for Professionals

As a professional, you can calculate your taxable income by reducing your expenses from gross receipts. For example, you have a gross revenue of Rs 10 lakh for FY2024-25 as a technical consultant.

Your expenses were as below:

Internet - ₹ 20,000
Salary for assistant - ₹ 2,00,000
Travel expense - ₹ 50,000

In this case, your taxable income will be ₹ 7,30,000 (gross revenue - expenses)

Presumptive Taxation for Freelancers

If you are a freelancer in any specified or non-specified profession, you get covered under the same rules as applicable to any other full-time specified or non-specified professional.

Tax Filing for Presumptive Tax

To avail of presumptive tax schemes, you need to file an income tax return using form ITR 4. Unless you are subject to an audit, you must file your return on or before 31st July of the Assessment Year (AY).

How to Reduce Tax Liability for Businesses & Individuals?

If your taxable income is over the threshold limit, you need to pay taxes. However, Indian income tax laws also allow deductions from taxable income if you spend or invest money in certain options:

Expenses Which Reduce Your Tax	Investments for Tax Saving
- School/college tuition fees for children	- Unit Linked Insurance Plan (ULIPs)
- Health & term life insurance premiums	- National Pension Scheme (NPS)
- Medical expenses of senior citizen parents/self	- Equity Linked Saving Scheme (ELSS)
- Principal repayment of the home loan	- Public Provident Fund (PPF)
- Interest payment on education loans	- Endowment & moneyback life insurance plans
- House rent payment (when you do not receive HRA)	- Pension Plans from life insurers
- Donations to recognised social institutions	- National Savings Certificates (NSC)
	- Sukanya Sammriddhi Yojana
	- Senior Citizen Saving Scheme
	- 5-year tax-saving deposit from the post office or bank

Businesses can also reduce direct tax liability by buying group insurance plans. These plans will help you offer better employee benefits, leave salary, health cover, gratuity, etc,. to your employees.

The majority of tax-saving investments are long-term investments, i.e., ranging from 3 years to 15 years or more. Thus, using tax saving investments to save for your long-term goals is a more efficient way of investing in your goals.

Use Tax-Saving Investments and File Taxes

Whether you run a business or work as an individual, you should know your tax liability. You should file your ITR with the correct information and on time. To lower your tax liability, you can invest in tax-saving investment options. Such options reduce your taxes, give you financial security and generate wealth over time.

Investments in tax-saving schemes can offer a reduction of up to ₹ 2 lakhs per year in your personal taxable income. Expenses like health insurance and term insurance premiums are important for every breadwinner of a family. These plans ensure long-term financial safety for you and your family from unforeseen mishaps.

Disclaimer - This article is issued in the general public interest and meant for general information purposes only. The views expressed in this blog are solely those of the writer and do not necessarily reflect the official policy or position of Canara HSBC Life Insurance Company Limited or any affiliated entity. We make no representations or warranties of any kind, express or implied, about the completeness, accuracy, reliability, suitability, or availability with respect to the blog or the information, products, services, or related graphics contained in the blog for any purpose. Any reliance you place on such information is therefore strictly at your own risk. You should consult with a qualified professional regarding your specific circumstances before taking any action based on the content provided herein.

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