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Presumptive Income Tax Filing for Business and Individuals

Presumptive Income Tax Filing for Business and Individuals

Presumptive Income Tax Filing
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To make tax filing simpler for professionals and small businesses, the Indian Income Tax had 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 chose 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:

a) No Maintenance and Auditing

- You do not need to maintain account records. Also, there is no need to get your account audited.

b) 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.

c) 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.

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 accounts.

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

  • Your income is more than Rs 1.2 lakh or
  • Your total sales, gross receipts, or turnover is more than Rs 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 Rs 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 kinds

Presumptive Taxation Computation for Businesses

Assume your business had total revenue of Rs 1.25 crore in FY 2020-21. You have cash receipts that sum to Rs 75 lakh, and digital transactions accounted for Rs 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 Rs 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 Professional

Under the 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 Rs 1.2 lakh in any of the three immediately preceding years.
  • Started with a profession in a particular year, and the receipts exceed Rs 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 Rs 25
  • Original bills or receipt of value more than Rs 50

Other Professions

Profession mentioned in the above table are required to maintain record without any monetary limit. In case of other profession, Rs. 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 gross revenue of Rs 10 lakh for FY21 as a technical consultant.

Your expenses were as below:

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

In this case, your taxable income will be Rs 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 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 like, 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 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 your financial security and generate wealth over time.

Investments in tax-saving schemes can offer a reduction of up to Rs 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 family from unforeseen mishaps.

Disclaimer: This article is issued in the general public interest and meant for general information purposes only. Readers are advised to exercise their caution and not to rely on the contents of the article as conclusive in nature. Readers should research further or consult an expert in this regard.


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