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Presumptive Taxation For small businesses, traders,SME,MSME

Presumptive taxation involves the use of indirect methods to calculate tax liability, which differ from the usual rules based on the taxpayer’s accounts. In this case, the business entity is required to declare a given percentage of his business turnover as his income and has to pay at fixed percentage of it as tax. They are aimed to bring small and medium businesses that are sometimes outside the tax net.

Types of Business entities

Depending on the nature and size of the business some of the legal entity options available & eligible are Sole Proprietorship, HUF & Partnership Firm

Presumptive Taxation under 44AD-Buiness Income

There are small businessmen who are unable to keep and maintain books of accounts for various reasons can opt for presumptive taxation and declare profits at 8% under section 44AD of Income Tax Act. When the amount of total turnover or gross receipts are received by an account payee cheque or a bank draft or use of electronic clearing system through a bank account, the assessee can declare profits at 6%.

For payments received in cash, the profits would continue to be considered at 8%.

To encourage businesses to receive payments digitally, the govt has also provided an incentive to Businesses who receive payments digitally. Profits on payment received digitally by businesses would be considered at 6% of the total amount received digitally.

Example: Suppose if the total turnover is Rs.1.5 Crores in a previous year, you can pay tax on the profit of Rs.12 lakhs (8% at Rs.1.5 Crores) or on the profit of Rs.9 lakhs (6% of Rs.1.5 Crores) if done through banking channel (all receipts are received by a cheque or NEFT or Debit/Credit Card)

Eligible Businesses

Any kind of business can opt for presumptive taxation except the business of plying, hiring or leasing goods carriages and whose total turnover or gross receipts in the previous year does not exceed Rs.2 Crores. (This is increased to Rs.10 cr if cash turnover is less than 5%)

In case the assessee is running more than one business, turnover of all the businesses in question need to be considered.

Small traders & Businessmen, SMEs, MSME, small business traders doing business in manufacturing, wholesale, retail, Kirana shops or trading

What's MSME?

MSME stands for Micro, Small and Medium Enterprise (MSME)

Classification- Manufacturing Enterprises and Enterprises rendering Services

OLD (up to 2020)

Composite Criteria: Investment in Plant & Machinery/equipment and Annual Turnover

Micro- Investment in Plant and Machinery or Equipment: Not more than Rs.1 crore and Annual Turnover; not more than Rs. 5 crore

Small- Investment in Plant and Machinery or Equipment: Not more than Rs.10 crore and Annual Turnover; not more than Rs. 50 crore

Medium- Investment in Plant and Machinery or Equipment: Not more than Rs.50 crore and Annual Turnover; not more than Rs. 250 crore

New (from 2021)

What are Micro Units (in 2021?)

Earlier the criteria were solely on an investment basis. Like:

1. An investment up to Rs 10 lakh for service units

2. An investment up to Rs 25 lakh for manufacturing units.

New Definition of Micro Units

MSMEs will now be called a micro-unit if up to one crore, it can be proprietor own money or through MSME business loan, has been invested into it and it has a turnover of less than Rs 5 crore. Unlike earlier now these two aforesaid factors will define a micro unit.

New Definition of Small units

As for the small units, the investment limit has been doubled from the earlier rupees 5 crore to rupees 10 crore, now besides that it must have a turnover of less than 50 crore. This new definition encompasses all MSMEs, service enterprises included, earlier service enterprises were under-investment of up to Rs 2 crore category.

New Definition of Medium units

An enterprise that has an investment up to Rs 20 crore along with a turnover of less than Rs 100 crore will now be called a medium unit. Whereas earlier, the investment limit for a medium unit was up to Rs 10 crore and for Service enterprises, the limit was up to Rs 5 crore.

Ineligible Businesses

Ø A person earning income by way of commission or brokerage

Ø A person carrying on any agency business

Eligible Assessees

The conditions to be eligible for presumptive taxations are:

ü Assesse should be a resident of India

ü Assesse can be an individual or HUF or a partnership firm but not LLP

ü Assesse, who has not claimed deduction under sections 10A, 10AA, 10B, 10BA or deduction under any provisions of Chapter VIA under the heading “C-Deductions in respect of certain incomes” in the relevant assessment year

Due date for filing of return-31st July

Payment of advance tax: Once you opt for presumptive taxation you are liable to pay whole amount of advance tax on or before 15th March of the year, which means not pay advance tax in installments.

Declaration of Lower Income

If the actual income of the assessee is lower than the income calculated under the Presumptive Scheme, the assessee can claim such lower income which is actual, provided the assessee mandatorily maintains his books of accounts as specified under section 44AA and get the books audited under section 44AB.

Opting out of Presumptive Taxation

If an assessee who declares that his profits and gains from the profession/business are lower than the income computed on presumption basis or when the income exceeds the limit, he shall be required to keep and maintain books of accounts as required under sub-section (1) of section 44AA and get them audited and furnish a report of such audit as required under section 44AB.

When an assessee opts for presumptive taxation under section 44AD, they need to continue this scheme for 5 years. If he declares profit not accordance with the provisions of this section then he shall not be eligible for this scheme for the next 5 years from the year in which he declares profit not as per section 44AD. This is no such restriction for the professions as per section 44ADA.

Important Points

· Assessee should be a resident in India

· Deductions under the provisions of section 30 to 38 shall be deemed to have been already given full effect

· Depreciation: The written down value of any asset used for the purpose of business shall be deemed to have been calculated as if the assessee had claimed and had been actually allowed the deduction in respect of the depreciation for each of the relevant assessment years. This is particularly important at the time of sale of that asset. The Capital Gain will be calculated as the difference between the sale value and the 'written down value' so calculated after reducing the depreciation as mentioned above.

· Salary and interest to partners: In case of a partnership firm, salary and interest paid to partners shall not be allowed to be deducted from the net profit @ 8% of 6% as the case may be. In calculating the net profit on the presumptive basis, it is assumed that the salary and interest to partners have been deemed to have been deducted/allowed

· An assessee can claim tax deductions and avail benefits under Chapter VI-A (Section 80C to 80U) even if he is declaring income as per presumptive taxation scheme under Section 44AD of the Income Tax Act.

Records to be maintained

You would have a Bank Account for transacting your Business/Profession.

You would have your Invoices, Cash Memos for Sale and Income as your customer would demand it.

You would have Supplier’s Invoices for tracking purchases & expenses and for tracking payments and stamping “Paid”, when payment is made with payment details.

You can opt for presumptive Taxation if your Business Turnover/Professional Income is below Rs.2 cr (increased to Rs.5 cr if cash turnover is less than 5%) or Rs.50 lakhs. Then presumptive Income is 6% for turnover generated by collecting sales via Cheque or inward bank transfer. As regards cash business turnover, presumptive income would be 8% for Business & 50% for professional income.

If, your turnover is below limits set in presumptive taxation, you may like to begin by not having Books (if not required to track your transactions, Bank Balances, Stock Level, Outstanding (Debtors or Creditors), then you can avoid Software and Accountant by doing following:

ü Have to get regular (monthly, quarterly & annual) Bank Statement in Excel format.

ü Have separate Bank Accounts for your personal transactions and separate for your Business and thus you can track Business transactions by analyzing only Receipt/Deposit side Transactions and assess your Income/Turnover.

ü Analyse Payment side transactions for TDS Compliances regarding those liable for TDS Compliances. Your Purchases or expenses are not relevant as you would be offering % of Income/Turnover as Taxable Profits.

Should a person offering income presumptively maintain books of accounts?

No. A person opting for presumptive income scheme need not maintain any books of accounts

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