Measures for Promoting Digital Payments & Creation of Less-Cash Economy: Benefit of lower rate of Income Tax on digital turnover for small businesses.

The benefit of lower rate of Income-tax on digital turnover for small businesses up to a turnover of Rs.2,00,000,00 (Rupees Two Crore), announced by the Government yesterday under Section 44AD of the Income-tax Act, 1961 is a huge benefit given to businessmen for promoting digital/banking transactions. The benefits given are explained in the following paragraph.

If a trader makes his transactions in cash on a turnover of Rs.Two Crore, then his income under the presumptive scheme will then be presumed to be Rs. 16 lakhs @ 8% of turnover.  After availing of Rs. 1.5 lakhs of deduction under Section 80C, his total tax liability will be Rs. 2,67,800/-. However, if he shifts to 100% digital transactions under the new announcement made, his profit will be presumed to be at Rs. 12 lakhs @ 6% of turnover, and after availing of Rs. 1.5 lakhs under Section 80C,  his tax liability now will be only Rs.1,44,200/. Here, digital transaction includes payment received by Cheque or through any other digital means. In the following example, the benefit obtained by traders and small businesses is explained in 3 different scenarios:

Particulars 100% Cash Turnover (Rs.) 60% Digital Turnover (Rs.) 100% Digital Turnover (Rs.)
Total Turnover 2 Crore 2 Core 2 Crore
Cash Turnover 2 Crore 0.80 Crore NIL
Digital Turnover NIL 1.2 Crore 2 Crore
Profit on Cash Turnover @ 8% 16 Lakh 6.40 Lakh NIL
Profit on Digital turnover @ 6% NIL 7.20 Lakh 12 Lakh
Total Profit 16 Lakh 13.60 Lakh 12 Lakh
Deduction u/s 80C 1.5 Lakh 1.5 Lakh 1.5 Lakh
Taxable Income 14.50 Lakh 12.10 Lakh 10.50 Lakh
Tax Payable 2,67,800 1,93,640 1,44,200
Tax Saving NIL 74,160 1,23,600

Apart from making a tax saving of almost 46% by migrating to banking mode, the small businesses would be able to build their books which may also help them get bank loans easily.  Also, if transactions are carried out through banking channels, then anybody having annual turnover up to Rs. 66 lakhs will have zero tax liability after availing the benefit of Section 80C, after amendment of this new rate structure.

Source- Press Information Bureau, Government of India, Ministry of Finance, Dated-20-December-2016

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  1. Pranjal Bansal says:

    Sir you have not taken maximum income not chargeable to tax into account while calculating the aforesaid tax…..for say: tax on Rs 16,00,000/- would be calculated in following manner:-
    Total Income= 16,00,000-2,50,000(Basic)-1,50,000(80C)= 12,00,000/-
    Tax on above-
    1st 2,50,000 @ 10% = 25,000
    next 5,00,000 @ 20%= 1,00,000
    Remaining 2,00,000 @ 30%= 60,000
    Total Tax= 1,85,000 +3% (education cess)
    = 1,90,550/-

  2. Satchin says:

    I can understand tax payable portion in this scenario
    14.50 L – upto 5L = 50k
    then remaining 9.50 L @ 20% =1.90 L + 3% cess = 7200/- all together = 247200/- compare to 2,67,800/-
    Please anybody explain in this tax portion and it is filing with ITR4-S.


    let it execute then one can assess the result.There is lot of contradiction such :Cheuque ,Rtgs,Neft payments are considered or not,Effect of other taxes .

  4. C R Shetye says:

    What does the term “Transaction” mean? Is it the payment made by the merchant or Is it the payment recieved by the merchant?

    Please elaborate, what all ways are considered Digital?


    can you tell me how much money a trader will have to pay to the card issuing bank for digital money. it is about 2% or some thing around in confusing slabs from time to time. so any benefit garnered through new scheme of 6% on digital sales is a farce and no trader will save any tax at all. this move seems a move to help wall street and bankers only at the cost of public exchequer. people will find means to fail it.

  6. DINESH BANSAL says:

    that turnover of Rs 2 crore ,the audit is mendatry . then the question of 44AD DOES NOT ARRISE. tHE BOOKS OF ACCOUNTS MUST BE MAINTAINED AS WELL AS IN G.S. T. THE MAINTAINCE OF BOOKS OF ACCOUNT IS COMPULSARY . I think this not possible for the business.

  7. KARTHIK says:

    I will agree with Sandeep. POS charges should be waive off whose turnover is less than 60 lacks so that small traders start purchase the swiping machines.

    And, as per my understanding, no business man worry about income tax (they ready to pay) all are worry about indirect taxes only. So Govt., should thing about benefits in Indirect Taxes and not direct taxes.

  8. S Varghese says:

    That calculation is perfectly right. POS charges to merchant have to be reduced to 0.5% and income tax rate on 2 crores to 4% even for about Rs 80000/- net benefit.

  9. rAVI KANT vERMA says:


  10. Sandeep says:

    Modi Government making only tall claims about their acts but on reality they have not achieved anything and change in rules everyday creates confusion and no one can plan his business

  11. ALIASGAR HAMID says:

    Is this scheme going to last for some years. Or after few days, months or a year government will think again like done now a days and change the provisions. Who will guarantee the consistency for a reasonable period ???


    Transaction should be said as paperless transaction rather than Digital Transaction or all transaction without cash should be treated in this scheme like cheque, RTGS, NEFT and DD.
    One more clarification is required Turnover means what if my Purchase is higher than sale and i m having stock in hand and i my sale is in cash but purchase is digital I am applicable for scheme?

  13. Manoj Kumar Agrawal says:

    Dear Sandeep,

    You are right in your calculation, but Government of India dont,t wants to provide the profit of ease of business and they wants to ease the mode of payment to cashless economy, RBI should end all the charges on payment mode made other than cash to boost the economy .

  14. S Pams says:

    Every day they are simply changing the rules and they are not doing anything to the common man. Fed up with this Govt. They don’t have BRAIN. No faith on this Govt.

  15. Vijay Kumar Dadoo says:

    It may be very difficult to have no cash transaction in a business. However, traders, manufacturers filing I T return under 44AD, may try to bring down the cash transaction to may be 25-30% from now on. If Govt. clears these two pints, may be many would like to avail of 6% profit calculations right in the current financial year.
    Reply may come from Govt.

  16. sandeep says:

    what about pos charges?
    if they are waived it would be benefit
    otherwise it is look like promoting cash sales

    2 crore @8percent. 16 lac
    2 crore @6 percent. 12 lac
    saving in taxable income 16-12 lac=4 lac
    tax saving = 4 lac *30percent = 1.2 lac

    pos charge = 2crore *2percent = 4 lac
    additional outflow= 4 lac – 1.2 lac = 2.8 lac

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