Is it perfectly fair to take advantage of Presumptive Taxation for FnO traders with the intention to reduce tax liability? For e.g. Turnover = 1 Crore, Actual Profits = 40 Lakhs.
presumptive scheme is designed to give relief to small tax payers.
you can declare 8% or 6% as applicable as your taxable income.
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I already understand that.
But the opinion is already divided on whether FnO traders should use presumptive income to reduce their tax liability. I am not sure if IT department will consider use of presumptive scheme “fair”, though as per the text it may be technically okay.
Hi @nituldas,
Under the presumptive taxation scheme you need to report higher of the following:
- Profits @ 6% of the turnover
- or actual profits.
In case your actual profits are higher than 6% of the turnover, you should report the actual profits.
You can read more about the presumptive taxation scheme u/s 44AD here
All the expenses are deemed to be claimed if you opt for presumptive taxation scheme. No further expenses can be claimed.
Hi @teenscm,
You cannot claim expenses when you opt for the presumptive taxation scheme. However, you can continue to claim Chapter VIA deductions.
@Quicko
Since we don’t have to maintain books if we file under 44 AD, how will we know if actual profits are greater than 6% of turnover or not?
Isn’t the whole point of Section 44 AD, to provide relief for small taxpayers from maintaining books of accounts by just presuming profits are 6% of turnover? If we need to report actual profits, then it would be necessary to maintain books of accounts and track all expenses like salaries paid, office rent, electricity, fuel, subscription to services and other overheads.
What am I missing?
Hi @Roy,
The idea behind the presumptive taxation scheme is that taxpayers can focus more time on running their business, rather than maintaining books of accounts and bookkeeping.
When opting for the presumptive taxation scheme, taxpayers do not need to maintain books of accounts like P&L or balance sheet and let go of the requirement to get audited.
The Income Tax Act states, that under a presumptive taxation scheme, taxpayers need to report their income at the minimum of the predefined rate or the actual profit - whichever is higher.
When opting for the presumptive taxation scheme, you cannot claim business expenses like salaries paid, rent, or other overheads.
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Then if you need to report actual profits how are expenses offset and what is the whole point of presumtive taxation, Quicko has no idea what they are talking about. Please refer to your senior and get back.
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Under presumptive taxation, your tax liability will be determined on the basis of percentage of your profits (8% for cash and 6% for non-cash). Since FnO would be in the non-cash category, your net profit would be calculated at 6% of your turnover. That net profit will become your taxable income and will be taxed accordingly.
Eg - You have a turnover of INR 1crore. Your net profit as per presumptive taxation would be 6% * 1 cr = INR 6 lakhs. This 6 lakhs will be your taxable income and taxed accordingly.
But what if your actual net profit (taxable income) is only INR 4 lakh (or any amount lower than INR 6 lakhs)? In that case, you would not be able to claim a profit of less than 6%. So you would be better off maintaining your books of accounts and not opting for presumptive taxation to claim lower profit and hence lower tax liability.
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What if my profit is more than 6% of turnover like 20%? Still i will be taxed at 6%?
Yes, you will still be taxed at 6%. But do remember that you will not be allowed to deduct any expenses and that your turnover should be below the permissible limit
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cool, just wanted to know did you file presumptive tax for fno? or are you a CA. I have let say FNO turnover of 1 crore and profit of 45 lakh, with Presumptive tax i would be still paying tax on 6 lakhs. Wouldn’t it raise any flag or i am safe? Just wanted to understand any edge cases here
I also had same thing in mind, if i need to mention higher profit than 6% without expenses whts the point of presumptive tax than?
So we can use presumptive taxation and save some right? I am confused now.
For the purpose of levy of income tax 6% or more may be considered as income, but actually this is not the actual income of the assessee. If the actual income of the assessee is higher, then the actual income is to shown in the return of income.
The provisions of presumptive taxation are enacted to facilitate computation of total income and
filing of return of income. It does not give a license to the assessee to declare lower income despite
the assessee having a higher income. The assessee is legally bound to return higher income if the same
is higher than the benchmark given.
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