ITR-4 Sugam: 6% vs 8% Rule in the New Default Tax Regime

Key Takeaways

• Default Regime Impact: The new Direct Tax Code 2025 (effectively the New Tax Regime) is the default option. Retailers filing ITR-4 must now actively opt-out to use the Old Regime and claim deductions.
• Presumptive Income Unchanged: The core calculation under Section 44AD—declaring 8% of cash turnover and 6% of digital turnover as income—remains the same regardless of which tax regime is chosen to pay tax on that income.
• Deductions are the Deciding Factor: The choice between the Old Law (1961) and the New Law (2025) hinges entirely on the value of deductions (like those under Chapter VI-A) a retailer can claim. High deductions favor the Old Law.
• Compliance Change: Taxpayers with business income who wish to opt out of the default new regime must file Form 10-IEA before the ITR filing due date. This choice has long-term implications, as switching back and forth is restricted.

PART 1: EXECUTIVE SUMMARY

(Target: 200 Words. Clear overview of the tax change.)

This guide provides a professional analysis of the transition from the Income Tax Act, 1961 to the framework of the new Direct Tax Code 2025, specifically focusing on its impact on retailers filing ITR-4 (Sugam) under the presumptive taxation scheme. With the new code's tax slabs becoming the default, understanding the nuances is paramount for tax optimization.

• The Old Law (1961): Under the previous system, taxpayers could freely choose between the old tax slab structure, which allowed for a wide array of deductions and exemptions (e.g., under Section 80C, 80D, HRA), and the new, lower-rate regime which disallowed most deductions. For ITR-4 filers, this choice was made annually.

• The New Law (2025): The new tax slab structure is now the default tax regime. This represents a significant procedural shift. The method of calculating presumptive income—8% for cash turnover and 6% for digital receipts under Section 44AD—has not changed. The change lies in how this final income figure is taxed. To utilize the old system's benefits, a formal opt-out is now required.

• Who is Impacted: This change primarily affects small business owners and retailers with a turnover of up to ₹2 crore (or ₹3 crore if cash receipts are under 5%). Specifically, those who have significant tax-saving investments, insurance premiums, or other deductible expenses will be most impacted, as they must now perform a careful evaluation to see if forgoing these deductions for the new regime's lower rates is beneficial.

PART 2: DETAILED TAX ANALYSIS

(Instruction: Exhaustive and professional. Target length: 1200-1500 Words. Use Markdown tables, bold text for key terms, and bullet points to make it scannable.)

1. The Regime Transition Context

The introduction of the Direct Tax Code 2025 marks a pivotal shift in India's direct tax landscape, making the simplified, lower-rate tax structure the default for all individual taxpayers, including those with business income. This move is designed to simplify the tax system and reduce litigation. However, for retailers who have historically leveraged the presumptive taxation scheme under Section 44AD of the Income Tax Act, 1961, this transition requires a strategic re-evaluation of their tax planning.

The essence of Section 44AD remains intact. It is a simplification measure allowing small businesses to declare a percentage of their turnover as income, thereby bypassing the need for maintaining detailed books of accounts and undergoing a tax audit. The critical rates are:

• 8% of Gross Turnover/Receipts for amounts received in cash.
• 6% of Gross Turnover/Receipts for amounts received through digital or banking channels.

The fundamental change is not in how presumptive income is calculated, but in how the tax on that income is computed. The Default Regime (New Law 2025) offers more slabs and generally lower tax rates but eliminates access to over 70 common deductions and exemptions, most notably those under Chapter VI-A (like Section 80C for investments, 80D for health insurance), standard deduction, and interest on housing loans. The Optional Regime (Old Law 1961) retains these deductions but has higher tax rates.

For a retailer filing ITR-4, the choice is no longer a simple annual selection within the ITR form. It is now a formal decision that, for business owners, carries significant future consequences. Opting out of the default new regime to use the old one makes you ineligible to return to the presumptive scheme for five years if you later show profits lower than the 6%/8% benchmark. Furthermore, switching from the new to the old regime can only be done once in a lifetime for those with business income.

2. Detailed Comparison: Old Scheme vs Default 2025 Scheme

The decision-making process for an ITR-4 filer must be grounded in a clear comparison of the two regimes. The following table breaks down the core differences from the perspective of a retailer using the presumptive scheme.

Practical Implication for Retailers:

A retailer with a high turnover but low actual profit margins benefits immensely from the presumptive calculation itself. The choice of the regime post-calculation depends on their personal financial habits.

• A retailer with significant investments in PPF, ELSS, life insurance, and who pays for medical insurance and has a home loan will likely find the Old Law (1961) more beneficial, as the tax savings from these deductions can easily outweigh the benefit of the lower tax rates in the new system.
• Conversely, a retailer with minimal investments and no major deductible expenses will almost certainly benefit from the lower tax liability under the New Law (2025).

3. Break-Even Mathematical Analysis

To determine the optimal regime, a break-even analysis is essential. This analysis identifies the total amount of deductions a taxpayer needs to claim under the Old Regime to make it more tax-efficient than the Default New Regime.

Scenario:

• Assessee: A resident individual retailer, age 40.
• Total Turnover: ₹90,00,000 for the financial year.
• Mode of Receipts: 100% via digital modes.
• Presumptive Income (u/s 44AD): 6% of ₹90,00,000 = ₹5,40,000.

Let's analyze the tax liability with and without deductions.

Case 1: No Deductions Claimed

Without any deductions, the New Law (2025) provides a clear tax saving of ₹8,840.

Case 2: Maximum Common Deductions Claimed

Assume the retailer claims:

• Section 80C: ₹1,50,000 (e.g., PPF, LIC)
• Section 80D: ₹25,000 (Medical Insurance)
• Total Deductions: ₹1,75,000

With deductions of ₹1.75 lakh, the Old Law (1961) becomes significantly more beneficial, with a tax saving of ₹6,500.

The break-even point is the amount of deduction at which the tax liability under both regimes becomes equal. For most income levels between ₹7.5 lakh and ₹15 lakh, this point generally falls in the range of ₹2.0 lakh to ₹3.75 lakh of total deductions.

4. How to Opt-Out (If Applicable)

Since the New Law (2025) is the default, a retailer must follow a specific procedure to use the Old Law (1961).

1. Mandatory Filing of Form 10-IEA: A taxpayer with business income who wishes to opt for the old tax regime must electronically file Form 10-IEA on the income tax portal.
2. Timeline: This form must be filed on or before the due date for filing the Income Tax Return under section 139(1). Filing it after the due date will render the choice invalid for that assessment year.
3. Quoting in ITR: The acknowledgement number and date of filing of Form 10-IEA must be mentioned in the ITR-4 form.
4. Consequences of Opting Out: It is critical to understand that for a person with business income, this decision is not easily reversible. If you opt for the old regime, you can switch back to the new regime only once. After that, you cannot return to the old regime in any subsequent year.

This procedural requirement adds a layer of compliance that did not exist before and necessitates a firm, well-analyzed decision before the filing season begins.

5. Final Recommendation

The transition to a default New Tax Regime under the "Direct Tax Code 2025" framework necessitates a proactive approach from retailers filing ITR-4. The presumptive income calculation of 6% or 8% of turnover remains a powerful tool for simplification, but the ultimate tax liability is now dictated by the choice of regime.

Our Team's recommendation is tiered:

• For Retailers with Low or No Deductible Investments/Expenses: The Default New Regime (New Law 2025) is unequivocally the superior choice. The lower tax rates will result in direct and significant tax savings without any change in financial behavior. There is no compliance action needed; simply file the ITR as usual.

• For Retailers with Substantial Deductions: For taxpayers who consistently maximize their benefits under Sections 80C, 80D, HRA, and home loan interest, the Old Regime (Old Law 1961) will likely remain more tax-efficient. It is imperative for these individuals to:

  1. Quantify their total eligible deductions for the year.
  2. Use an online tax calculator to compare the precise liability under both regimes.
  3. If the Old Regime is beneficial, they must remember to file Form 10-IEA before the ITR filing deadline.

The core principle is clear: the tax benefit of deductions in the old regime must exceed the tax benefit from the lower slab rates in the new regime. A detailed, personalized calculation is no longer just advisable—it is a mandatory step for prudent tax planning.

💡 Tax Planning Tip: Use a reliable tax calculator to check your break-even point between the Old and New Regime in 2026.