Here is how you can save money, time and effort by paying presumptive tax

With times evolving, a large part of today’s taxpayers works for itself rather than taking the conventional 9-to-5 job. It is common to see people quitting their comfortable jobs and becoming freelance professionals, consultants, doctors, interior decorators, etc. 

India's tax laws have made it mandatory for individuals in professions like legal, medical, engineering, architectural, accountancy services, etc, to maintain books of accounts so that tax authorities can compute their total income. A freelancer who is into any of these professions would also be bound by this mandate. A freelancer might be relieved of this if she opts to go for presumptive taxation. Read on to understand the concept of presumptive taxation, the benefits of opting for the same and the conditions attached.

What is Presumptive Taxation?

Opting for presumptive taxation helps professionals and freelancers show income on an estimated basis. Further, they are not required to maintain detailed accounting records or spend time separating business expenses from personal ones.

This special scheme of reporting income is called the ‘presumptive scheme’. Presumptive means your income is assumed and actual numbers do not have to be reported. Tax is paid on the assumed income.

This scheme was earlier allowed for businesses; professionals could not opt for it. The benefits of the scheme lie in the ease and simplicity of return filing. It allows small taxpayers to focus on their work by reducing their compliance burden.

This scheme, brought into the statute vide Finance Act 2016 effective from April 1, 2016, allows professionals having gross receipts of up to Rs 5 million to file their returns declaring 50 per cent of their gross receipts (income before deducting expenses) as income. After giving effect to the deductions under section 80, tax must be paid on the balance amount.

Creative professionals eligible to opt for this scheme have been listed by the government -- architects, interior decorators, engineers, technical consultants or those in any other profession as notified by the board.

  • A resident Indian earning income in an Indian bank account from a foreign client

This is a confusion that creative professionals usually have. Whether the income they make from a foreign client is taxed in India or not? The answer is ‘YES’. As a resident of India for income tax purposes, your global income will be taxed in India.

  • A resident Indian earning income in a foreign bank account from a foreign client

Being a resident Indian, even if you receive income from a foreign client in your foreign bank account, it will be taxed in India. To sum up, for a resident of India, her global income would be taxable in India. However, she can take recourse to the provisions of the Double Taxation Avoidance Agreements (DTAA) that India has entered into with various countries to ensure her income does not get taxed twice. Therefore, if she is offering to tax in India her foreign income which has already been taxed in another country, she can claim the credit for such tax paid abroad against her tax liability in India.

What are the Benefits of presumptive taxation?

1. Easy to file: The tax form is shorter and simpler as compared to the complex 30 pages ITR form. For presumptive taxation ITR 4 is filed.

2. Save money: Professionals can now file tax returns on their own instead of paying a tax consultant. Typically, consultants charge anywhere from Rs 5,000 to Rs 15,000 for such filings. 

3. Save tax: Usually, professionals do not have many expenses to declare. By declaring 50 per cent of the income as profit and the rest as expenses, a lot of tax saving can be done.

4. No books of accounts: Freelancers who opt for the presumptive scheme are not required to maintain books of accounts.


For an enhanced understanding of Presumptive Taxation, let us take an example:

Shweta is an interior decorator. She earned an income of Rs 4 million in 2017-18 -- that is, between April 1, 2017, and March 31, 2018. That is a lot of money, but it also leads to a lot of tax. In the normal course of things, without using the benefit of presumptive tax, Shweta’s taxable income (the amount she would need to pay tax on) would be something like this.

Without Presumptive Taxation
With Presumptive Taxation
    Total gross income for the year from

     various assignments and projects
    Work related expenses
    Presumed taxable income after availing

     presumptive taxation scheme (50% of Gross Income)
    Taxable Income
    Total Tax Outgo (calculated on the basis of slab rates)

Therefore, Shweta can save up to Rs 300,000 if she follows presumptive taxation. That is, she will have to pay Rs 300,000 less as income tax. 

Furthermore, all Section 80 tax-saving deductions and investments can also be claimed.

What if you have a day job and do freelancing work on the side?

Often, salaried employees with regular day jobs do additional freelance or consulting work in their free time. In such cases, can they benefit from the presumptive taxation scheme? The answer is yes.

When you have a job and also do freelance work, you have two kinds of incomes – salary income and non-salary income. Since both are income, you have to pay tax on both. Taxation on the salary income is computed in a regular way. You need to add your freelance income to this salary income to compute your total taxable income for the year. While doing this, you can use the benefit of presumptive taxation and add only half of your freelance income to your salary income.

For example, if your salary income is Rs 2 million and your freelance income is Rs 1 million, you can use presumptive taxation and add only half of the latter to your total income. This way, your total income for the year will be Rs 2.5 million.

Remember that in such a case you will have to use ITR-4 to file your income tax returns. .  

Disclaimer: Views expressed are personal. They do not reflect the view/s of Business Standard.

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