Zero Income Tax for Small Businesses Upto ₹2 Crore Turnover Tax reform was planned in Budget 2025, with a 0% tax rate for enterprises with yearly sales of up to 2 crore. This policy reduces regulatory requirements for professionals, startups, and MSMEs by harmonizing with the presumptive taxation scheme under Sections 44AD and 44ADA. The initiative aims to boost entrepreneurship, simplify tax compliance, and promote digital transactions for the benefit of India's small businesses.
Understanding Section 44AD for No TAX. Section 44AD of the Income Tax Act offers presumptive taxation to small business having turnover of ₹2 crores or less, under which are fixed at 6% or 8% of their turnover as their taxable income and do not have to keep elaborate books of account or submit for audit.
Eligibility criteria for business to fall under the Section 44AD criteria? 1. The entire turnover or gross receipts from the business or profession should not exceed Rs. 2 crore in the applicable fiscal year.
2. The business should not be involved in any professions listed in Section 44AA of the Income Tax Act, such as legal, medical, engineering, or architectural services.
3. The business should not offer any agency, commission, or brokerage services.
4. The business should not be in the business of operating, employing, or leasing cargo carriages.
How to calculate your income under section 44AD? 1. Individuals and Hindu Undivided Families (HUFs) engaged in qualified business activities have a presumptive income of 6% of their total turnover or gross revenues.
2. For individuals and HUFs working in qualified professions, the presumptive income is determined as 50% of total gross receipts.
3. For partnership firms engaged in qualified business operations, the presumptive income is determined as 8% of total turnover or gross receipts.
4. It is crucial to note that the presumptive income derived under Section 44AD is subject to additional deductions and exclusions provided under the Income Tax Act.
Let us understand this with an example.
In the financial year 2024-25, if MSME’s turnover is 2cr, with 6% tax rate, ₹12 lakhs taxable income will incur ₹80,000 in taxes.
Financial year 24-25 ₹(Lakhs) 0- 3 (Lakhs) @ 0% 0 3 - 7 (Lakhs) @ 5% 20000 7 - 10 (Lakhs) @ 10% 30000 10 - 12 (Lakhs) @ 15% 30000 Tax 80000
But from financial year 2026-27 onwards, since income up to ₹12 lakhs is exempted from taxation – No tax on MSMEs will be charged!
Financial year 26-27 ₹(Lakhs) 0- 4 (Lakhs) @ 0% 0.00 4 - 8 (Lakhs) @ 5% 20,000.00 8 - 12 (Lakhs) @ 10% 40,000.00 Tax 60,000.00 Rebate U/S 87A -60,000.00 Tax payable 0.00
This means MSME’s save more and have more to invest!
Limitations and Considerations 1. Businesses who choose the presumptive taxation plan are not permitted to carry forward any losses to later years.
2. Limited deductions: Under the presumptive taxation structure, certain deductions, such as depreciation and income-generating expenses, may not be fully granted.
3. Regular tax regime: In some situations, firms may find it more advantageous to choose the regular tax regime, particularly if their real profits are less than the presumptive income.
This regulation will support MSMEs and startups. It will make tax compliance easy and promote entrepreneurship in India.
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