India’s presumptive tax system is a straightforward approach to help reduce tax stress. You have most likely heard about the presumptive tax system if you are a small business owner, freelancer, or professional. Without delving into thorough accounting, this is a simplified approach to figure and pay income tax. The government instituted it to simplify life for those with modest to moderate incomes.
To determine whether the presumptive tax system is appropriate for you, let’s examine how it operates.
What is the Presumptive Tax System?
Under the presumptive tax system, the Income Tax Department assumes your income at a set percentage of your whole turnover. You are not required to keep a complete book of accounts or have them audited. Small businesses can access this system under Section 44AD.
- Section 44ADA: For professionals
- Section 44AE: For transporters
Using the Presumptive Tax System: Who Can?
- Section 44AD – Small Businesses: Indian citizens with turnover up to ₹3 crore (should 95% of receipts be digital)
- Income is assumed at 8% of turnover—or 6% if digital.
- Income is assumed at 8% of turnover—or 6% if digital.
- Section 44ADA: Professionals Indian professionals in fields including doctors, lawyers, architects, consultants
- Gross receipts running up to ₹75 lakh
- Income is assumed at half of the whole receipts.
- Gross receipts running up to ₹75 lakh
- Section 44AE: Transporters for those owning goods vehicles
- Income is set depending on the vehicle count owned.
- Income is set depending on the vehicle count owned.
Presumptive Tax System’s Advantages:
- Not necessary to keep accounting books.
- Not required to have an audit.
- Straightforward tax computation.
- Less documentation and less of a compliance load.
When Should One Make This Decision?
- You have modest income with little business expenses.
- One company or job generates most of your income.
- You want to avoid complicated filings and CA fees for audits.
- You have few cash transactions and make digital payments.
How Under This System Should One Pay Taxes?
- Calculate the section’s presumptive income (6%, 8%, or 50%).
- Add it to other income sources—if any—here.
- Use the usual income tax slab.
- Should it be necessary, pay advance taxes.
- Form ITR-4 filed by July 31st.
Crucially Important Points:
- Should you choose presumptive tax, you have five years to comply (Section 44AD).
- Should you flip back and forth, you could forfeit the advantage for the next five years.
- For your records, you still must maintain simple notes of income and expenses.
- You can claim reduced income, but then you have to keep perfect books and face audits.
Finish
For many Indian small taxpayers, the presumptive tax system is a wise and straightforward choice. It saves time, lessens stress, and helps to avoid complicated tax filings. If you qualify, this could be the simplest approach to keep tax-compliant while concentrating on your work or business.
