Get an increase in the presumptive tax threshold now

Micro enterprises with turnover up to Certain professionals with turnover up to 2 crores and above 50 lakh can avail the benefit of presumptive taxation. I propose to provide an increased limit of 3 crore more 75 lakh respectively to taxpayers whose cash receipts do not exceed 5%, the Finance Minister said in his budget speech.

“Presumptive tax regime is a simplified way of filing tax returns for small businesses and professionals. The concept of presumptive taxation is ‘what you declare in the return is treated as your income’. It is applicable to declare business related expenses etc. Takes away the burden on the taxpayer for the same. This will reduce the compliance burden for a lot of small businesses and professionals,” said Aditya Sesh, Founder and Managing Director, Basis Fund Services.

Presumptive taxation for businesses is covered under section 44AD of the Income Tax Act. So far, businesses that have revenue 3 crore can avail the benefit of presumptive taxation, as long as cash receipts do not exceed 5% of this revenue.

For example, a businessman whose income is 3 crore (maximum limit) and meets the eligibility criteria of presumptive tax, is liable to pay tax only on 8% of the revenue, or 24 lakhs.

Similarly, professionals earning up to 75 lakh in a financial year will now be eligible for presumptive taxation, as long as their cash receipts are within the 5% cap of total turnover.

For example, consider the earnings of a lawyer. 75 lakhs in a financial year from his practice; he is liable to pay tax on 50% of his gross receipts or 37.5 lakhs. Not only an individual, but partnership firms and Hindu Undivided Families (HUFs) can also take advantage of the presumptive tax mechanism. It does not include Limited Liability Partnership (LLP).

“The 5% cash limit ensures that there is more transparency. Allowing more businesses to use the presumptive tax mechanism will improve ease of doing business for small enterprises,” says Ashok Shah, founding partner, NA Shah Associates.

“The increase in the presumptive tax limit will reduce the compliance burden for small businesses and encourage them to avail this option. Small business owners are not required to maintain separate bank account statements, separate cash files, sales files or audit books in order to meet compliance requirements. If they meet the enhanced eligibility criteria, they can only go through the presumptive tax mechanism,” said CA Abhishek Soni, co-founder, Tax2Win.

Under presumptive taxation, small businesses and professionals are exempted from maintaining or getting their books of accounts audited. Otherwise, businesses are required to maintain books of accounts as per the IT Act.

While the move will benefit more businesses and professionals, there is a five-year cooling-off period if they opt out of the scheme midway. Therefore, if you were to opt for the scheme in FY24, FY25 and FY26 but not in FY27, you cannot avail the benefit of presumptive taxation for five years from FY28-FY32.

It is also important to remember that once you opt for presumptive taxation, you cannot claim tax deductions that are otherwise available to a regular taxpayer.