India’s presumptive tax regime, popular among small businesses and consultants for its low compliance requirements and ease of filing, now allows taxpayers to disclose their investments alongside their returns when filing their Income Tax Return (ITR).
The presumptive tax scheme simplifies filing for small businesses with turnover up to Rs 2 crore, or Rs 3 crore with 95 percent digital transactions, to declare 6-8 percent of sales as profit. Also, specified professionals, such as freelancers and consultants, with receipts up to Rs 50 lakh, or Rs 75 lakh if cash receipts are under 5 percent, can declare 50 percent of receipts as profit.
What has changed?
The government has added a new column to the ITR form for presumptive taxpayers to report their year-end investments alongside their income.
“This is the first time that details relating to investments are being required under ITR 4. However, reporting such appears to be optional for now. The said details are, however, to be reported if details are available,” an tax expert said.
According to tax analysts, the tax department could spot inconsistencies earlier, largely by relying on external data, such as bank reports, property transactions, and the AIS—and action was usually taken only if a case was picked up for scrutiny.
“There was no specific requirement within the return itself to disclose investments alongside presumptive income, which didn’t directly flag inconsistencies,” another tax expert said.
When there’s a mismatch
Analysts believe that the tax authority’s move to add an investment column is intended to verify whether a person’s assets are commensurate with the income they have declared in their returns under the presumptive scheme.
“The intention appears to be to ascertain if the investments held are commensurate with the income disclosed on a presumptive basis. If the investments exceed the income returned or reported, this may invite a scrutiny assessment, and taxpayers will be required to justify the source of funds used to make such investments,” he said.
There is also exposure to penalties for under-reporting or misreporting, and in some cases, even the use of the presumptive scheme itself could be questioned.
Penalties for incorrect disclosure
If a presumptive taxpayer has significantly understated their income, this mismatch can now be flagged much more easily. Analysts warn that such a mismatch could lead to scrutiny, and any unexplained investments may be treated as income and taxed accordingly, often at higher rates.
For small businesses and specified professionals under the presumptive scheme, the penalty for under-reporting of income is levied at 50 percent of tax, whereas, in case of misreporting, the penalty is levied at 200 percent as per Section 270A of the Income Tax Act, 1961.
“The penalty framework itself hasn’t changed with this update. What has changed is the likelihood of it being triggered. With the added disclosure of year-end investments in the return, tax authorities can easily identify inconsistencies between declared income and actual financial position, which could lead to these provisions (Section 270A) being invoked more frequently,” he said.
How to correct mistakes?
In case a presumptive taxpayer finds that the income of a particular year is declared at an amount lesser than the actual figures, he has an option to file an updated return within 4 years from the end of the assessment year to which the return relates.
“The key is to act early. Once a notice is issued or proceedings are initiated, the flexibility to correct mistakes reduces and exposure to penalties increases. A timely correction not only ensures compliance but also preserves the benefits of the presumptive scheme,” she said.
Filing an updated return allows presumptive taxpayers to correct underreported income or update investment disclosures without immediate penal consequences, provided the ITR is filed within the due dates.
Continue or exit presumptive regime?
“As long as the investments are commensurate with the income declared over the years, there should be no reason to exit,” he said.
