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Small businesses with turnover up to ₹1.5 crore can become income tax free due to full rebate

The section 87A of the Income Tax has been amended to provide full tax rebate up to taxable income of ₹5 lakhs

In the interim budget presented by caretaker finance minister Piyush Goyal on February 1, a major relief has been provided to the income taxpayers, with the increase in the threshold for the rebate. Now, full tax rebate has been provided for taxable income up to ₹5 lakhs under section 87A of the Income Tax Act. This means, if the net taxable income after all eligible deductions and exemptions come down to ₹5 lakh or lower, one will need not to pay any income tax.

This rebate will benefit an estimated 3 crore middle-class taxpayers comprising self-employed, small business, small traders, salary earners, pensioners and senior citizens, and the total tax benefit is estimated to be ₹18,500 crore.

Thus, even if a salaried person earns ₹75,000 per months, that person may not need to pay income tax, provided he/she is able to take the benefits of various exemptions available under the Income Tax Act. In fact, if a person earns a salary income of ₹9.75 lakhs and earns ₹10,000 as interest income, such taxpayers can take the benefit of the full income tax rebate.

But it is not only salaried people who benefit from this, other than the standard deduction which is available only for salaried income, other exemptions and the rebate is applicable for all categories of taxpayers. Due to this, small businesses and traders having an annual turnover up to ₹1.5 crore may not need to pay any income tax.

The section 44AD of the Income Tax Act provides the small businesses with the option to use a presumptive profit to calculate tax liabilities instead of maintaining accounts for the same. Businesses and trades having annual turnover up to ₹2 crore can use the presumptive taxation scheme. For such businesses, 6% of the annual turnover is taken as income of the taxpayer, and income tax will be calculated on this amount. For this, all the transactions in the business must have taken place via digital mode, including cheques, demand drafts, debit and credit cards, and any other cashless mode. For businesses doing business in cash, the rate of presumptive income is 8%.

Now, let’s take the case of income tax a small business with cashless transaction having an annual turnover of ₹1.5 crore in cashless transactions in both pre-budget and post-budget scenario.

Particulars Before Interim Budget After Interim Budget
Total Turnover of Business ₹1,50,00,000 ₹1,50,00,000
Presumptive profit rate (@6%)1 6% 6%
Profit as calculated u/s 44AD ₹9,00,000 ₹9,00,000
Income from other sources (Interest on Savings Bank Account) ₹10,000 ₹10,000
Gross Taxable Income ₹9,10,000 ₹9,10,000
Deduction under Section 80C (Investments) (₹1,50,000) (₹1,50,000)
Deduction under Section 80CCD (1B) (Contribution to NPS) (₹50,000) (₹50,000)
Deduction under Section 80D (Medical Insurance) (₹25,000) (₹25,000)
Deduction under Section 80TTA (Interest on Savings Bank Account) (₹10,000) (₹10,000)
Deduction under Section 24 (Home Loan Interest) (₹2,00,000) (₹2,00,000)
Net Taxable Income ₹4,75,000 ₹4,75,000
Income Tax ₹11,250 ₹11,250
Less: Rebate under section 87A (Full rebate upto Rs. 12,500) Nil (11,250)
Total tax payable after Rebate ₹11,250 Nil
Health & Education Cess @4% ₹450 Nil
Total Income Tax Payable 11,700 Nil

 

Therefore, while earlier the taxpayer would have to pay ₹11,700 as income tax including cess, now full rebate of tax can be obtained, if various exemptions are claimed.

A business using presumptive income need not keep detailed accounts for taxation, also there is no requirement of an audit of books.

Professionals also can file income tax returns using presumptive income under section 44ADA of Income Tax act. But in the case of professionals, the income is taken at 50% of turnover, up to ₹ 50 lakhs in a year.

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