The new Income Tax Act, 2025, which replaces the Income Tax Act, 1961, has become applicable from 1 April 2025.
According to the government, there have been no policy changes—only simplification of the language and rationalization of the structure of the provisions. One area where this exercise is evident is presumptive taxation.
Three schemes combined
The 1961 Act had three separate presumptive taxation schemes—one for small businesses (6% or 8% of turnover, with turnover limits of ₹2 crore/ ₹3 crore), one for low-income professionals (50% of gross receipts, with receipt limits of ₹50 lakh/ ₹75 lakh), and one for transport operators of commercial goods vehicles (presumptive income based on vehicle capacity, subject to a limit of 10 goods transport vehicles).
All three have now been consolidated into a single section under the 2025 Act and will apply from the tax year 2026-27, for which income tax returns will be filed next year.
The new provision contains a table setting out the type of business or profession, conditions for eligibility, limits of total turnover or gross receipts, and the manner of computation of presumptive income.
The eligibility conditions, turnover limits and method of computing presumptive income remain unchanged from the 1961 Act for all three categories.
Higher income clarified
One of the issues under the earlier law was whether taxpayers whose actual income exceeded the presumptive income could still offer only the presumptive income to tax.
There was a common misconception that, irrespective of actual income, taxpayers could simply offer the presumptive income to tax. The language of the earlier provision, however, indicated that the higher of the two amounts had to be offered to tax, as it referred to a sum higher than that claimed to have been earned by the taxpayer.
Under the 2025 Act, this has been made explicit and unambiguous. The computation table specifies both the presumptive income and the profit claimed to have actually been earned, and clearly provides that the higher of the two will be treated as taxable income.
Deduction dilemma
The other significant change—whether intended or unintended—relates to the applicability of deductions.
Under the 1961 Act, once presumptive income was taxed, all deductions under the head "Profits and Gains of Business or Profession" were deemed to have been allowed, and no further deduction under those provisions, such as depreciation, could be claimed.
The 2025 Act, however, states that any loss, allowance or deduction under the provisions of the Act shall not be allowed against the presumptive income.
This is broader than the earlier restriction, as it applies to all losses, allowances and deductions, and not merely those relating to the computation of business income.
Of course, if the taxpayer opts for the new tax regime, deductions for investments and losses from self-occupied house property are in any case not available. However, there are other items that may still affect taxpayers, even under the new regime.
To illustrate, a taxpayer may have a loss from another business (which does not fall under the presumptive taxation provisions), a loss from house property on account of interest paid on a housing loan for a let-out property (up to the permissible limit), or a loss under the head "Income from Other Sources" arising from interest paid on borrowings used to invest in debt instruments.
Under the earlier law, such losses could generally be set off against presumptive business income under the head "Profits and Gains of Business or Profession". Under the 2025 Act, such set-offs may no longer be available.
Of course, these losses can still be set off against other eligible income, wherever permitted under the Act.
A substantive change?
This is a significant and substantive change, and not merely a drafting simplification.
One does not know whether this is a drafting error or an intended policy change, particularly given the government's repeated assertion that the 2025 Act was not meant to introduce substantive policy changes.
If this is indeed an unintended drafting mistake, the law may need to be amended, which would likely happen only during the next Budget.
Therefore, taxpayers should carefully review the new provisions while computing their income for the tax year 2026-27, remaining alert to changes in the law that may appear minor on the surface but could materially affect the computation of taxable income.
Gautam Nayak, partner at CNK & Associates LLP