Presumptive Tax Scheme Gets Tighter: What To Do, What To Avoid While Filing ITRs

With the latest changes in income tax return requirements, taxpayers under the presumptive taxation scheme are expected to be a little more transparent about their financial lives, especially when it comes to investments. The idea is straightforward: if your declared income is modest but your investments are growing rapidly, the numbers should add up. This doesn’t mean genuine taxpayers have anything to worry about, but it does signal that the tax department is paying closer attention than before.

Presumptive Taxation: Who Can Opt And Why It Works

The presumptive taxation scheme is a simplified tax framework designed for small taxpayers, allowing them to simply declare a fixed percentage of their gross turnover/receipts as taxable income, thereby eliminating the burden of maintaining detailed books of accounts, simplifying overall tax compliances and, thus, making tax filings significantly easier and faster.

The scheme is categorised into three primary segments, each with specific eligibility thresholds:

i. Small Businesses: Individual, HUFs or partnership firms (excluding LLPs) being resident in India can opt for this scheme in case their annual turnover/receipts do not exceed Rs 2 crore or Rs 3 crore where turnover is substantially through digital and banking modes.

“Income is usually taken at 8 per cent of turnover/receipts, while through digital or banking channels may qualify for a lower presumptive rate of 6 per cent. However, taxpayers are free to voluntarily declare a higher income than the prescribed rates. The most common examples of small business taxpayers opting for the said scheme include traders, retailers, shopkeepers, contractors, freelancers etc,” says Sanjoli Maheshwari, Executive Director, Nangia & Co LLP.

ii. Professionals: This category typically covers professionals such as doctors, lawyers, chartered accountants, architects, engineers, consultants etc. If annual gross receipts of such professionals do not exceed Rs 50 lakh or Rs 75 lakh where receipts are substantially through digital and banking modes, in such cases, 50 per cent of gross receipts is generally treated as taxable income. However, taxpayers are free to voluntarily declare a higher income than the prescribed rates. This is particularly beneficial for self-employed professionals.

iii. Transport Operators: A separate presumptive system is also available for taxpayers engaged in the business of plying, hiring or leasing goods vehicles. In such cases, income is not calculated as a percentage of turnover. Instead, it is determined on a fixed basis depending upon the type and number of goods vehicles owned during the year. This provision is especially useful for small truck owners and transport operators.

“The presumptive scheme offers a simpler route to tax compliance as it reduces the burden of maintaining detailed books of account and undertaking detailed tax calculations which can be both time-consuming and costly. Since income is computed on a presumptive basis, taxpayers are not required to undergo complex calculations of every business expenditure and evaluate its tax deductibility as per in the regular taxation framework, thereby making the tax filing process faster and more convenient,” says Maheshwari.

The presumptive taxation framework is generally best suited for small traders, retailers, shop owners, consultants, freelancers, self-employed professionals and transport operators. The scheme, primarily introduced with the objective of balancing ease of doing business with reduced tax compliance, continues to remain an important relief measure for India’s small taxpayer segment.

Why Are Taxpayers Under This Scheme Required To Declare Investments Now?

The latest change in the income tax return (ITR) form applicable for taxpayers opting for the presumptive taxation scheme requires them to disclose investments, indicating a shift towards greater financial transparency. The likely objective behind this move is to enable the tax authorities to compare a taxpayer's reported “presumptive” income against his year-end investments, which will aid in identifying and flagging cases where the investment growth is significantly higher than the reported taxable income, requiring further verification.

“At the same time, this change does not necessarily mean every taxpayer making an investment will face scrutiny. Genuine taxpayers with proper sources of funds, past savings, loans or other explained sources may not face questioning by the tax authorities, provided disclosures are made correctly. The larger purpose appears to be discouraging misuse of the presumptive scheme by understating income while building significant assets,” adds Maheshwari.

Eligible taxpayers under the presumptive taxation scheme can continue to file their returns through the official Income Tax Department’s e-filing portal using the applicable return form, subject to satisfaction of prescribed conditions.

Positives And Negatives Of The Shift

According to the latest ITR forms applicable for FY 2025-26, the mandatory particulars are limited to items, such as sundry creditors, inventories, sundry debtors, balance with banks and cash-in-hand, and do not mandate compulsory disclosure of investments as such. However, as investments are now linked to PAN and Aadhaar, and get reflected in the Annual Information Statement (AIS)/ Taxpayer Information Summary (TIS), making data harvesting instantaneous for the tax authorities, the year-end investments should appropriately be disclosed by the taxpayers.

As such, the inclusion of the aforesaid financial disclosure fields suggests that the presumptive tax scheme is gradually moving towards a more information-based compliance framework. However, it may remain far simpler than a regular taxation framework, provided the taxpayers ensure that the income declared in the return is broadly consistent with their financial profile.

“One clear positive of this development is greater credibility for genuine taxpayers. Where disclosures are properly made and income is consistently reported, small businesses and professionals may benefit from a cleaner financial record while dealing with banks, lenders or other institutions,” says Maheshwari.

Penalties For Incorrect Disclosure Of Income And Investments

In case the matter is selected for detailed tax scrutiny and if the declared income is considered underreported or misreported, a penalty under Section 270A of the Income Tax Act may apply.

Broadly for FY 2025-26, the penalty can be levied at 50 per cent of the tax payable on under-reported income and may go up to 200 per cent of the tax payable on misreported income.

“However, in case where investments, property purchases, bank deposits or other assets are not supported by explained sources, the same may be considered as unexplained investments, thereby imposing tax liability which may be as high as 78 per cent along with a penalty of 10 per cent, leading to significant potential tax exposure,” says Maheshwari.

What To Do To Stay Compliant?

Staying compliant under the presumptive taxation scheme is not difficult if you keep a few practical habits in mind. Make sure you accurately report both your professional income and any personal investments, and ensure that the numbers you declare - income, expenses, and investments - are consistent with each other.

“It’s always a good idea to cross-check details with your AIS, Form 26AS, and bank statements before filing, and keep basic documents handy in case they are needed later. At the same time, avoid red flags, such as reporting very low income while showing high-value investments without a clear explanation. Don’t assume that opting for presumptive taxation means your return won’t be scrutinised, and never ignore notices or mismatch alerts from the tax department. Lastly, steer clear of using rough or unverified figures - accuracy and consistency go a long way in keeping things hassle-free,” says Abhishek Soni, CEO & Co-founder, Tax2win.

How To Avoid And Correct Mistakes

Taxpayers opting for presumptive taxation need to be mindful of a few key aspects while filing their ITRs. In addition to using the correct form (ITR-4 Sugam) and selecting the appropriate presumptive option, they should ensure consistency between declared income and investment patterns.

“It is also important to reconcile and cross-check all investments with bank statements, Form 26AS, and AIS—verifying amounts, Permanent Account Number (PAN) details, and dates - and to report all investments accurately,” says Deepashree Shetty, Partner-Global Mobility Services, Tax & Regulatory Services, BDO India.

Conclusion

According to tax experts, the additional investment disclosure under the presumptive tax scheme is essentially a transparency measure.

“For honest taxpayers with explainable investments, this should not pose any difficulty, but it will help the tax department flag cases where income declared appears inconsistent with asset creation. By asking for year‑end investment disclosure, the government is signalling that simplified taxation will coexist with technology‑enabled checks to prevent misuse of the scheme,” says Richa Sawhney, Tax Partner, Grant Thornton Bharat.

FAQs

What is the presumptive income tax scheme?

The presumptive income tax scheme is an option provided to small businesses and specified professionals to make their tax filings simpler. Taxpayers eligible to avail this scheme can simply declare a fixed percentage of their total turnover or receipts as profit and pay tax on that amount.

Why are taxpayers under this scheme now required to declare their investments?

For the financial year 2025-26, the government has introduced a new column in the tax return form used by presumptive taxpayers, where they must now disclose their year-end investments. This requirement was not present last year.

What are the penalties for wrong disclosure of income and investments?

If a taxpayer declares less income than actually earned, the tax officer can impose a penalty of 50 per cent, but in case this is construed to a be a deliberate act, then the penalty rate sharply increases to 200 per cent.