All You Need To Know About the Presumptive Taxation Scheme

It has always been a hassle for small taxpayers, such as small businesses and freelancers, to file taxes effectively. Freelancers, in particular, juggle multiple roles and receive payments from multiple sources, both domestic and international. To ease their burden regarding taxes and compliance, the government has devised a specialised scheme called the Presumptive Taxation Scheme. If you run a small business or are a professional, such as a freelancer, you can choose the Presumptive Taxation Scheme as an ideal method for filing taxes for freelancers in India. 

The Presumptive Taxation Scheme is a tax scheme introduced by the Central Board of Direct Taxes (CBDT) to allow small taxpayers, such as small businesses or freelancers, to pay income tax on presumptive income and not actual profits. Section 44AD and Section 44ADA define the rules and guidelines for the presumptive taxation scheme. 

Understanding Section 44AD: Presumptive Scheme for Businesses

Section 44AD specifies that a business can opt for the presumptive taxation scheme if its annual turnover does not exceed Rs. 2 crores (or Rs. 3 crores if 95% of the receipts are through online modes).

Individuals who are residents, resident partnership firms (excluding Limited Liability Partnership Firms LLP), and resident Hindu Undivided Families (HUFs) are eligible to benefit from the presumptive taxation scheme under Section 44AD, provided their annual turnover or gross receipts do not exceed the specified limit in the preceding financial year.

Under Section 44AD, businesses can report a minimum of 6%-8% of the gross sales or turnover as income in their ITR without having to maintain extensive books of records

Section 44ADA: Presumptive Taxation Scheme for Professionals 

Under Section 44ADA of the Income Tax Act, professionals such as freelancers with an annual turnover of up to Rs. 50 lakhs can opt for the Presumptive Taxation Scheme.

But that's not all. If 95% of the receipts are through online modes, the limit increases to Rs. 75 lakhs for a professional.

According to the rules specified in Section 44ADA, the gains or profits from the profession must be equal to or greater than 50% of the total gross receipts on a presumptive basis.

Many businesses and freelancers choose this scheme because it allows them to file taxes without maintaining detailed books of accounts or submitting financial statements and bills

Eligibility Criteria For Presumptive Taxation Scheme 

The two major classifications under presumptive taxation are businesses and individual professionals. Any business with Rs. 2 crores or less as annual turnover and any professional with Rs. 50 lakhs or less as annual earnings can opt for the scheme. Although businesses have been defined as legal entities, individual professionals are further categorized into two sections: 

Here are the eligible legal entities under Section 44AD and individual professionals under Section 44ADA of the Income Tax Act:

If you are not engaged in professional activities other than those mentioned above, you will need to adhere to the rules specified under Sections 44AD and 44ADA for non-specified professions. 

The following businesses and taxpayers are excluded from opting for the Presumptive Taxation Scheme: 

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Calculation of Presumptive Income for Freelancers Under Section 44ADA

As we’ve seen, if you are a professional, freelancer, or consultant, you can pay income tax on only 50% of your gross annual income by utilising the Presumptive Taxation Scheme under Section 44ADA of the Income Tax Act. 

The calculation of presumptive income under the section is simple. You only have to determine 50% of your gross total earnings and pay tax on the determined amount by ITR. Here is a detailed example: 

Suppose you are a freelancer and have earned Rs. 40 lakhs in FY 2022-23. As your annual earnings are lower than Rs. 50 lakhs, you are eligible to opt for the Presumptive Taxation Scheme. Opting for the Presumptive Taxation Scheme will allow you to pay a tax on 50% of the gross earnings, i.e., on Rs 20 lakhs only. 

However, without the presumptive taxation scheme, the taxable income would be Rs. 30 lakhs due to the maximum allowable work-related deductions (including travel expenses, meeting expenses, and communication expenses) of Rs. 10 lakh, resulting in higher taxes.

Individuals who opt for the Presumptive Taxation Scheme are allowed all tax deductions under Sections 30-38 and Sections 80C to 80U of the Income Tax Act. However, they are barred from claiming any further business expenses from their taxable income. 

Advance Tax under the Presumptive Taxation Scheme 

If you opt for the Presumptive Taxation Scheme, you are liable to pay the entire advance tax amount before 15 March of the financial year. Advance tax refers to the payment of income tax in instalments throughout the financial year rather than as a lump sum at the end of the year.

If you fail to pay the advance tax amount and your tax liability exceeds Rs. 10,000, interest under Section 234C will be levied. 

Presumptive Taxation For International Payment

If you are a freelancer or a professional and opting for this taxation scheme under Section 44ADA of the Income Tax Act, you must add international earnings to your total income while computing your presumptive income. Most international clients deduct TDS before sending payments. If deducted, you can claim a refund for the TDS amount if you fall under the tax liability. 

Even if they haven’t deducted TDS, you must add the amount received through international channels to your total income and pay the applicable tax. 

How to Opt for the Presumptive Taxation Scheme 

Here is the detailed process if you are looking to opt for the Presumptive Taxation Scheme:

ITR Form

To file taxes under the Presumptive Taxation Scheme, use Form ITR-4. If you have income from capital gains, file taxes using Form ITR-3. Mention the Business and Profession Codes based on your profession. The deadline to file ITR for FY 2023-24 (AY 2024-25) is July 31, 2024. 

Documents Required

It is important to link your Aadhaar and PAN to file Form ITR-4. Once linked, you will need documents such as Form 16, 16A, 26AS, and AIS, as well as bank statements, donation receipts, housing loan interest certificates, rental agreements, rent receipts, and investment premium payment receipts. 

5-Year Rule

If you choose the Presumptive Taxation Scheme, you must stick with it for the next five years. If you don't, you won't be able to choose this scheme for the next five years. For example, if you file under this scheme for AY 2019-20 and AY 2020-21 but don't opt for it for AY 2021-22, you can't choose the PTS for the next five AYs, i.e., AY 2022-23 to AY 2026-27. 

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Conclusion 

Freelancers receive payments from multiple sources, making it difficult for them to determine their total income and pay taxes based on the applicable tax rates. The Presumptive Taxation Scheme provides a simple way for professionals such as freelancers to pay taxes on 50% of their gross income and avoid paying higher taxes. The scheme makes taxation compliance simpler for freelancers and ensures they comply with the tax laws even if they receive international payments. 

If you are a freelancer receiving international payments, Skydo is a one-stop solution that can help you create a virtual currency account and easily comply with all the FEMA and taxation rules. Visit Skydo today to streamline your foreign currency transactions.