In the 2025 Union Budget, the Indian government introduced significant tax reforms to support small businesses and stimulate economic growth. One notable change is the adjustment in the presumptive taxation scheme under Section 44AD of the Income Tax Act, 1961. This scheme now allows eligible businesses with a turnover of up to ₹2 crore to benefit from simplified tax calculations, potentially resulting in zero tax liability under specific conditions.
Understanding the Presumptive Taxation Scheme
The presumptive taxation scheme is designed to ease the compliance burden for small businesses by allowing them to declare income as a fixed percentage of their turnover, eliminating the need for detailed bookkeeping. Under the revised provisions:
- Eligibility: Resident individuals, Hindu Undivided Families (HUFs), and partnership firms (excluding Limited Liability Partnerships) engaged in eligible businesses with a turnover up to ₹2 crore can opt for this scheme.
- Presumed Income:
- 8% of turnover for cash transactions.
- 6% of turnover for digital transactions.
How Zero Tax Liability Works
To achieve zero tax liability under this scheme, the calculated presumed income must fall below the taxable threshold. As per the 2025 budget, the basic exemption limit has been increased to ₹12 lakh for individuals. Therefore, if the presumed income is ₹12 lakh or less, no income tax is payable.
Example Scenario
Consider a sole proprietorship with a total turnover of ₹2 crore, all through digital transactions:
- Presumed Income: 6% of ₹2 crore = ₹12 lakh.
Since the presumed income equals the basic exemption limit of ₹12 lakh, the tax liability would be zero.
Implications and Benefits
This reform offers several advantages:
- Simplified Compliance: Small businesses can avoid maintaining exhaustive financial records, reducing administrative efforts.
- Tax Relief: Businesses operating with thin profit margins can benefit from reduced or zero tax liability, enhancing their financial viability.
- Encouragement of Digital Transactions: A lower presumptive rate for digital transactions promotes transparency and aligns with the government’s push towards a digital economy.
Important Considerations
- Applicability: This scheme is available only to individuals, HUFs, and partnership firms (excluding LLPs). Companies and other entities are not eligible.
- Turnover Limit: The ₹2 crore turnover cap is crucial. Exceeding this limit necessitates a shift to the regular taxation regime, requiring detailed accounting.
- Nature of Business: Certain businesses, such as those involved in agency services or earning income through commissions, are excluded from this scheme.
In summary, the 2025 budget’s adjustments to the presumptive taxation scheme under Section 44AD provide substantial relief to small businesses with turnovers up to ₹2 crore. By simplifying tax calculations and potentially reducing tax liabilities to zero, these reforms aim to foster a more conducive environment for small business growth and compliance.
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