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Business, Professional & Freelance

Presumptive Taxation for Business and

Profession
Updated on Aug 26, 2021 - 12:10:07 PM

Budget 2021 update :Taxpayers need to pay advance tax on dividend income only after
the declaration or payment of dividend.

Section I: Businesses
1. Selecting the Legal Entity
2. Maintaining Books of Accounts
3. Tax Audit
4. Due Date
5. Presumptive Taxation
6. International Transaction
7. Return of Income

Section II: Professionals

1. Professions for the purpose of Indian tax laws
2. Maintenance of books of accounts
3. Computation of Taxable Income
 4. Tax Filing
5. Applicability of Tax Audit
6. Presumptive Taxation
7. Freelancers Income

Section III: Others

1. Glossary of Terms
2. Frequently Asked Questions

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Section I: Businesses
 

Section I, includes the following:

1. Selecting the Legal Entity
2. Maintaining Books of Accounts
3. Tax Audit
4. Due Date
5. Presumptive Taxation
6. International Transaction
7. Return of Income

1. Selecting the Legal Entity

<
Setting up a new venture one of the first questions you encounter when you begin your business is what legal entity
it should be set up as. Depending on the nature and size of the business some of the legal entity options available
are:

a. Sole Proprietorship

b. Limited Liability Partnership

c. Private Company
 d. Public Company

e. Joint Venture

As such, there is no legal rule that a ‘company’ must be formed to start a business. Incorporating a company has its
own pros and cons. Forming a company increases compliance work. If your business is growing rapidly and
becomes unmanageable, it helps to separate it into a separate legal entity which will have its own PAN and will file a
separate tax return. Else you may choose to carry on your business as a sole proprietor.

2. Maintaining Books of Accounts

If as a business any of the following criteria are met, then maintaining the books of accounts as per the income tax
act is mandatory:
a. Income is more the Rs. 1,20,000; or

b. Total sales, turnover or gross receipts are more than Rs. 10,00,000.

In any of the three immediately preceding previous years. This condition has further been relaxed for individuals and
HUF where they will be bound by the mandate of maintaining books of accounts only if :
a. Income is more than Rs 2.5 lakhs or

b. Total sales, turnover or gross receipts are greater than Rs 25 lakhs in any of the three immediately preceding
previous years.

Note:
The penalty for non-maintenance of books of accounts:

If you have not maintained the accounting records which you should have maintained as per law, you
would be liable for a penalty of up to Rs 25,000.

3. Tax Audit
For businesses having gross receipts of more than Rs 1 crore in a financial year are liable for tax audit.The due date
of filing the tax audit report is 30th September of the assessment year. The tax audit report must be filed
electronically via Form 3CD. For taxpayers subject to tax audit, the due date for filing of return of income is also 30
September of the assessment year.

Under normal circumstances, revision of a tax audit report is not possible. However, in cases where the accounts
have been revised it is possible to revise the tax audit report.

4. Due Date
 
a.Due date for filing of tax audit report – 30th September of the assessment year

b.Due date for return filing (if tax audit is applicable) – 30th September of the assessment year

c.Due date for return filing (if tax audit is not applicable) – 31st July of the assessment year

5. Presumptive Taxation
Presumptive taxation for businesses is covered under section 44AD of the income tax act. Any business which has a
turnover of less than Rs 2 crore can opt to be taxed presumptively. They must declare profits of 8% for non-digital
transactions or 6% for digital transactions, whichever one is applicable.

The following businesses are excluded from presumptive taxation:

a. Life insurance agents.

b. Commission of any kind.

c. Running the business of plying, hiring or leasing goods carriages.

A. Computation of Presumptive Taxation

 

Example:
Lalit Traders have gross receipts of Rs 1.5 Crore for FY 2017-18 and do not maintain books of
accounts. Lalit traders have opted for presumptive taxation. During the year Lalit Traders received Rs.
70 Lakhs through non-digital transactions (cash payments) and Rs. 80 Lakhs through digital
transactions.

What will be the income under the head business and profession?

Solution:
Income under the business and profession:

For non-digital transactions : 70,00,000 * 8% = Rs. 5,60,000

For digital transactions : 80,00,000 * 6% = Rs. 4,80,000

Income under the head “Business or Profession” will be = Rs 10,40,000

B. Benefits of Presumptive Taxation

 
National Defence Fund set up by the Central Government.
Prime Minister’s National Relief Fund.
In presumptive taxation under Section 44AD, your net income is considered as 8% of your turnover and you will
pay tax on that income.
If your receipts are in digital (non-cash) form then only 6% of your receipts is your net income and you will pay
tax on that income.
 You don’t have to maintain accounting records.
You don’t have to get your accounting records audited.
You have to pay advance tax – but instead of estimating income and paying tax each quarter, you can pay all
your advance tax before March 31. Advance tax, for taxpayers having opted for the presumptive scheme, is to
be paid by 15th March of the relevant financial year if you expect that your income tax liability will exceed
Rs.10,000 in the financial year.

6. International Transaction
 

a. TDS deducted by the foreign client

If you work for clients out of India, payments may be received by you via paypal or as a direct credit to your bank
account. Mostly, the foreign client would deduct taxes before releasing the payment to you in accordance with the
local tax laws there. You, as a resident of India, would anyway be liable to income tax on all your income. However,
you can claim credit for taxes paid overseas, in your return of income.

b. TDS not deducted by the foreign client

If no TDS has been deducted, there is nothing to worry. You need to include these receipts in your total income while
making income calculations and pay applicable tax on them since you will be a tax resident of India. To meet
advance tax requirements you may have to estimate your annual income from all sources.

7. Return of Income
An individual of HUF carrying on business will be bound to file his return of income in form ITR 3
For a taxpayer who
opts for presumptive tax is supposed to file his return in ITR 3

Section II: Professionals

 

Section II, includes the following:

1. Professions for the purpose of Indian tax laws
2. Maintenance of books of accounts
3. Computation of Taxable Income
4. Tax Filing
5. Applicability of Tax Audit
6. Presumptive Taxation
7. Freelancers Income

 
1. Professions for the purpose of Indian tax laws
 
Engineering
Legal
Architectural profession
Accountant
Medical
Technical consultant
Interior decoration

2. Maintenance of books of accounts

 

a. Professionals carrying on specified professions

Professionals carrying on the above mentioned specified professions are required to maintain books of accounts in
accordance with Rule 6F of the Income tax Rules. Such professionals will be required to maintain accounting records
if gross receipts exceeds Rs. 1.5lakhs in any of the 3 immediately preceding years. In case he has started off with his
profession in a particular year and his receipts exceed Rs 1.5 lakhs for that year, he is again supposed to maintain
accounting records for that year.

These are the accounting records that have been prescribed under Rule 6F.
i. Cash Book – A book to record all the cash receipts and payments which helps you know your cash balance at
the end of the day or end of the month.

 
ii. Journal – You have to maintain a log of all your day to day transactions . In accounting terms, you have to
record all the debits and credits, when you are following the mercantile system of accounting.

 
iii. Ledger – A book where all your entries flow from journal, has details of all the accounts and simplifies the
preparation of your financial statements at the end of a year

 
iv. You have to maintain photocopies of all the bills or receipts if the value is more than Rs. 25

 
v. Lastly, you have to maintain the original bills or receipts if the value is more than Rs. 50

If you are into the medical professions, you must maintain these additional records too.
vi. Daily case registers with details of patients, fees received, services provided and date of receipt

 
vii. Stock details of the medicines and other consumable items on the daily basis

b. Professionals carrying on non-specified professions

If you are carrying on any profession other than those discussed above, you would need to maintain such books of
accounts so as to enable an assessing officer to calculate your taxable income as per Income tax laws. However,
this mandate would arise only when income, if you are an individual, exceeds Rs. 2.5 lakhs or gross receipts are more
than Rs. 25 lakhs in any one of the immediately 3 preceding years.

3. Computation of Taxable Income

A professional could easily arrive at his taxable “Income under the head Profits and Gains from Business or
Profession” by reducing all his profession related expenses from this gross receipts out of the profession. The
profession related expenses could be salary (if you have engaged someone), rent for the premises from where you
are carrying out your profession, internet expenses, mobile expenses, official travel, lunch expenses (met officially)
etc.

Example:

Archana is an interior designer. She has received a gross revenue of Rs 15 lakhs from her profession for
the FY 2017-18. She has incurred the following expenses:
Internet and mobile – RS 25,000
Salary paid to 2 staff – Rs 3 lakhs
Rent for premises – Rs 1.5 lakhs
Lunch expenses – Rs 24,000
Travel expenses – Rs 1.5 lakhs

Here is how we determine her taxable income from business :

Particulars Amount (in Rs)

Gross receipts 15,00,000

(-) Profession-related expenses

Internet and mobile 25,000

Salary 3,00,000

Rent 1,50,000

Lunch expenses 24,000

Travel expenses 1,50,000

Net Income 8,51,000

This income will be added to other taxable income of Archana, the aggregate sum on which she is supposed to pay
her taxes at rates applicable to the income slab she falls under.
4. Tax Filing
As a professional, the form applicable to you is ITR 3. You will be liable to file your return on or before 31 July of the
Assessment Year unless you are subject to an audit under the Income-tax Act.

5. Applicability of Tax Audit

You would be liable for carrying out a tax audit if your gross revenue from profession exceeds Rs 25 lakhs during any
given financial year, Failure to get your books audited can attract a penalty of upto 0.5% of your gross revenue of Rs
1.5 lakhs whichever is lower.

6. Presumptive Taxation
A professional having a gross revenue upto Rs 50 lakhs can opt for the presumptive scheme of tax wherein he can
straightaway offer 50% of the gross revenue as his taxable income and pay taxes as per his slab rates on such
income. Once he opts for this scheme, he cannot claim any of the profession related expenses as a deduction again.

Further, anyone opting for this scheme is not bound by the mandate of maintaining books of accounts too. While he
is also liable to file his return by 31 July of the assessment year, he must file his return in ITR 4.

Further, he will be liable for tax audit in a scenario where he offers income lesser than the income arrived at on
presumptive basis and also his income exceeds the basic exemption limit.

Here is a simple example to help make you understand when this scheme can be opted for:

Example:

Rakesh is a practicing doctor and has an annual income of Rs 30 Lakhs in financial year 2017-18. The actual
expenses incurred by Rakesh for running his practice amount to Rs 3,00,000. The tax liability for Rakesh for FY 2017-
18 is as follows:

Particulars Tax liability with Presumptive taxation Tax liability without Presumptive
taxation

Income Rs. 30,00,000 Rs. 30,00,000

Expenses Rs. 15,00,000

(50% of income is eligible for Rs. 3,00,000
deduction)

Taxable Rs. 15,00,000 Rs. 27,00,000

income

Tax liability Rs. 2,62,500 (excluding cess) Rs. 6,22,500 (excluding cess)

Therefore it is evident that if Rakesh follows presumptive taxation, he will be able to save Rs. 3,60,000 from his tax
outgo.

7. Freelancers Income
Freelancers who are into any of the specified or non-specified professions, get covered under the same rules as
applicable to any other full-time specified or non-specified professional be it rules of computation of taxable income
and tax liability, maintenance of books of accounts, presumptive tax, return filing etc.
Section III: Others
 

Section III, includes the following:

1. Glossary of Terms
2. Frequently Asked Questions

1. Glossary of Terms
The Indian income tax law runs into hundreds of pages. There is no good reason for you to spend precious time
finding your way through it. Here’s a little glossary to help you master some basic tax terms which can be very handy
while filing your tax returns.

Books of accounts
Books of accounts means a record of all income, expenses, assets and liabilities of your business. These financial
records are essential for understanding the performance of your business. These may be compulsorily required in
some cases.

Deductions
Income from all the five heads is summed up and is called gross total income. From this gross total income,
deductions can be claimed. These deductions reduce your total tax outgo since they lower your gross total income.
Investments such as PPF, NSC or certain expense like life insurance premium, interest on education loan, medical
insurance are allowed as deduction from your gross total income.

Depreciation
When you purchase a capital asset, the benefit of such an asset is usually expected to last more than a year, such
assets are ‘capitalized’ and not charged to expenses when they are bought. Every year a small portion of its cost is
expensed and is allowed to be reduced from your income. This expense which is charged every year is called
depreciation.

Tax Deduction at Source (TDS)

Persons responsible for making payments have to deduct tax before making payment. The tax department wants
payers to deduct tax beforehand and deposit it instead of waiting for you (the recipient) to make the tax payment
yourself. The recipient of income receives the net amount (after deduction of tax at source). The recipient adds the
gross amount to his income. TDS is adjusted against final tax due, since it is tax already deposited on the recipient’s
behalf. TDS ensures steady flow of taxes for the government.

Advance Tax
Advance tax means income tax should be paid in advance instead of lump sum payment at year end. It is also known
as ‘pay as you earn’ tax. These payments have to be made in installments as per due dates provided by the income
tax department.
Form 26AS
Form 26AS has all tax related information of your PAN. It shows how much tax has been received by the government
against your PAN. It includes TDS, tax directly deposited by you, refunds made to you etc. You can understand how to
view and download your Form 26AS (https://cleartax.in/s/view-form-26as-tax-credit-statement/)

Tax audit
Tax audit is a review of your financial records by a Chartered Accountant.
Your books must be audited if:
a. You are a professional earning gross receipts exceeding Rs.50 lakhs

 
b. A Business owner with an annual revenue of over Rs.1 crores

 
c. You have opted for presumptive taxation, you declare your income below the prescribed percentage but your
total income exceeds the basic exemption limit of Rs. 250,000

Digital Signature
While filing the audit report, both the CAs signature as well as yours need to be included. For this, you must get a
digital signature. Digital signature certificate come with validity of one/two years.

Defective return notice under 139(9) for freelancers

When you file an income tax return using the ITR-3 Form, and you have ticked against “Are you liable to maintain
accounts under section 44AA” but have failed to provide full details in P & L and Balance Sheet sections in the return,
your return would be treated to be defective under Section 139(9).

List of deductible and nondeductible expenses

 
Rent for individual or shared office space
Work-related meal and travel expenses
Advertising, promotional and printing expenses
Depreciation on assets such as laptops or computers. See Income Tax Department’s list of depreciation rates
(http://www.incometaxindia.gov.in/charts%20%20tables/depreciation%20rates.htm)
Income tax return filing fees paid to private platforms like ClearTax
Travelling expenses for professional work
Conveyance expenses

2. Frequently Asked Questions

What is the due date for filing of return of income by an individual carrying out a business or a profession?
An individual carrying on a business or profession must file his return of income on or before 31 July of an
assessment year.
If he is subject to tax audit, he can file his return anytime on or before 30 September of the
assessment year.
These due dates apply in the normal course unless there is an extension of due dates
announced by the Central Board of Direct Taxes (CBDT).
When will a businessman or a professional be subject to tax audit?
In the case of a businessman, if his total turnover from business exceeds Rs 1 crore, he is liable to an audit
under the Income-tax Act under Section 44AB. In case he is a professional, if his gross receipts exceed Rs 25
lakhs, he is liable for a tax audit.
 I run a small business with a turnover of about 30 lakhs on an average every year. Do I have to maintain
accounting records?
Yes. If your turnover from business exceeds Rs 25 lakhs in any one of the immediately 3 preceding years, you
must maintain books of accounts. Not doing so can attract a penalty of Rs 25,000.
I have opted for the presumptive scheme of tax. Should I still pay advance tax?
If you have opted for the presumptive scheme of tax, you may not be liable to pay advance tax every quarter
but you must ensure you are paying all your advance taxes on or before 15 March of the concerned financial
year. Further, any taxes paid before the 31 March will be considered as advance taxes only.
Can a person opting for presumptive scheme of tax claim any further expenses from his gross income?
No. Once a person declares the prescribed percentage of his gross receipts or turnover as income, he cannot
once again claim any other expenses as a deduction.
Should a person offering income presumptively maintain books of accounts?
No. A person opting for presumptive income scheme under Section 44AD, 44ADA, 44AE etc, need not maintain
any books of accounts.
Can I opt out of the presumptive scheme if I feel it does not work well for me?
Once you opt for this scheme, you must follow it for the next 5 years. Opting out of it for any 1 year during
these 5 years will make you ineligible to again opt for it the 5 years immediately following the year when you
opted out of it.

For example, an assessee claims to be taxed on presumptive basis under Section 44AD
(https://www.incometaxindia.gov.in/_layouts/15/dit/mobile/faqs/faq-questions.aspx?
<br>key=FAQs+on+Tax+on+Presumptive+Taxation+Scheme&k=#”><span style=) for AY 2016-17. For AY 2017-
17 and 2018-19 also he offers income on basis of presumptive taxation scheme. However, for AY 2019-20, he
did not opt for presumptive taxation Scheme. In this case, he will not be eligible to claim benefit of
presumptive taxation scheme for next five AYs, i.e. from AY 2020-21 to 2024-25.

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Income Tax Audit under Section 44AB – Criteria, Audit Report, Penalty (/s/tax-audit-section-44ab/)

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