Presumptive Taxation in India: How the Income-tax Act 2025 Changes the 1961 Regime
Presumptive taxation has long been a relief mechanism in India’s income tax law, allowing small businesses and professionals to compute income on a simple, estimated basis rather than maintaining complex books. However, with the Income-tax Act, 2025 set to apply from April 1, 2026 (Tax Year 2026–27), this familiar regime is undergoing significant legal changes. As India transitions from the six-decade-old 1961 framework to a modernised tax code, small taxpayers need to understand how these changes impact their compliance and tax liabilities.
What Is Presumptive Taxation?
Presumptive taxation is a simplified method of calculating taxable income. Instead of tracking every expense and receipt, eligible taxpayers can declare income as a fixed percentage of turnover or receipts. This reduces the burden of bookkeeping, audits, and detailed compliance — especially for small business owners, professionals, and transport operators.
Under the 1961 Act, this regime existed in three separate sections:
- Section 44AD – For small businesses
- Section 44ADA – For specified professionals
- Section 44AE – For transporters (goods carriages)
These distinct schemes have now been consolidated into a single provision: Section 58 of the 2025 Act. While the idea is simplification, the substance of the rules has changed in ways that can notably affect many taxpayers.
Key Changes: 1961 Act vs 2025 Act
1. Shift from Business-Wise to Assessee-Wise Eligibility
Under the 1961 Act:
Eligibility for presumptive taxation depended on the type of business or profession. If you had multiple income streams — e.g., a trading business and earning some commission — you could still apply presumptive taxation for the eligible part of your business while treating other income separately.
Under the 2025 Act:
This changes to a stricter “assessee-wise disqualification.” If a taxpayer earns any income from commissions, agency business, or specified professional fees, they become fully ineligible for presumptive taxation — even for other eligible business activities. This is a major tightening and can catch small taxpayers who previously qualified under multiple income streams.
2. No Set-Off of Losses or Deductions
1961 Act:
Under presumptive taxation, routine business expenses (like rent, wages, or repairs) were deemed to be already allowed, and no further deduction was claimed. However, this did not stop a taxpayer from setting off genuine business losses or other allowable deductions from other income heads if applicable.
2025 Act:
The new Section 58 goes much further. It completely bars the set-off of any loss, allowance, or deduction against income computed presumptively. This includes losses carried forward from previous years and deductions such as those under popular chapters of the Act. In effect, once you opt for presumptive taxation under Section 58, that income must be included in total income without adjusting any losses or deductions — a significant material change compared to the old law.
3. Audit Triggers — Simpler Rules, But Tougher Triggers
One attraction of presumptive taxation under the 1961 law was that audits were less likely unless certain conditions were met — especially continuity over years.
1961 Act:
If a taxpayer declared profit below the presumptive threshold, an audit was triggered only if they had used the presumptive scheme at least once in the past five years and their total income exceeded the basic exemption limit. This continuity-based rule protected new or intermittent taxpayers from immediate audits.
2025 Act:
The audit requirement becomes outcome-based. Now, declaring income lower than presumptive rates will trigger an audit if total income crosses the basic exemption limit — even if the taxpayer doesn’t meet the old continuity criteria. In simple terms: just reporting lower profit can bring the audit hammer down under the new law.
What About Transporters and Professionals?
Transporters
For those covered under the old Section 44AE (owners of up to 10 goods vehicles), the presumptive rates and eligibility broadly remain the same under Section 58. However, the differences in loss set-off and audit conditions still apply.
A noteworthy positive change under the new Act is that transporters now enjoy a more reasonable audit trigger — audit is required only if both income is below the presumptive rate and total income exceeds the basic threshold. Thus, small transporters with incomes below the taxable limit may avoid books and audit entirely. This is a taxpayer-friendly tweak in the new audit rules.
Specified Professionals
The presumptive scheme for professionals (like doctors, lawyers, and consultants) continues at the same turnover limits and presumptive rates as earlier (around 50% of gross receipts). However, like others, they must now contend with no deductions or loss adjustments once opting for presumptive taxation — which could diminish the attractiveness of this regime for some professionals.
Advance Tax and Other Compliance Features
Just like the old law, advance tax relief — deferring most payments until later in the year — continues for presumptive taxpayers under the new Act. However, those in the transport business have slightly different advance tax rules compared to other categories.
Takeaway: Know Before You Opt In
While the Income-tax Act, 2025 has consolidated and streamlined presumptive taxation into a single section for administrative clarity, the substance of the regime is narrower and stricter in several respects.
Small businesses and professionals must particularly watch out for:
- Complete ineligibility if any disqualifying income exists
- No set-off of losses or deductions — ever
- Lower income declarations that may trigger audits
For many taxpayers, opting for presumptive taxation is no longer an automatic “easy choice.” With these substantive changes, careful tax planning and professional guidance will be key before electing the presumptive regime under Section 58 of the 2025 Act.
