Taxation Planning for FY 25-26 & FY 26-27

Taxation Planning for FY 25-26 & FY 26-27

Background

AA is a Proprietorship engaged in end-to-end managed IT services involving:
Resource management, Operational responsibility, Output-based delivery & 
Team-driven execution (not personal professional advisory)

Turnover & Profit (Expected)
FY 2025–26: TO ~₹3.5 Cr | Profit ~₹1.3 Cr (35–40%)
FY 2026–27: TO ~₹8.5 Cr | Profit ~₹3.5 Cr (35–40%)

AA has three adult family members: BB, CC, DD.

FY 2025–26: CC & DD already have income; planning possible only with AA & BB (Husband & Wife).
FY 2026–27: All options open for advance planning.

Questions for Practicing CAs
1️⃣ 44AD vs 44ADA – Correct Applicability

Given AA’s activity is managed services/business delivery (not a notified profession):
Is Section 44AD the correct presumptive section for AA?
Would 44ADA be inapplicable here?
Does client TDS under 194J impact eligibility for 44AD?

2️⃣ FY 2025–26 – Immediate Year (Limited Flexibility)

AA TO ~₹3.5 Cr, Profit ~₹1.25 Cr
Only BB available for income distribution

Questions

What is a reasonable/defensible amount AA can pay BB for services (GST + TDS)?
Is BB opting for 44ADA acceptable?
Should AA stay on 44AD or shift to normal taxation for FY25–26?

3️⃣ FY 2026–27 – Advance Planning Year

TO ~₹8.5 Cr, Profit ~₹3.5 Cr
All family members available

Questions

At what scale does 44AD become inefficient or risky?
Can we have 44AD being used for BB, CC & DD because AA will go into normal taxation?
When does LLP or Pvt Ltd become clearly preferable & which is better LLP or Pvt Ltd given that my TO will remain in 10-12 Cr range not beyond that?
Which structure is better from tax + compliance + scrutiny view?

4️⃣ LLP Option – Practical View

Profit share vs salary for partners – what would be tax efficiency?
Can partners rely only on profit share (no salary)?
Effective tax rate vs 44AD?
Is LLP more audit-safe beyond ₹3 Cr profit?

5️⃣ GST + Compliance

GST implications when family members bill AA?
Any red flags using GST + presumptive taxation?
LLP vs Proprietorship – GST concerns?

6️⃣ Risk & Scrutiny

Which structure is least litigative?
Common red flags in family tax planning?
Safe revenue/profit ratios to maintain?

Objective

Looking for a CA-recommended structure for:

FY 2025–26: optimization within constraints

FY 2026–27 onward: scalable, compliant, low-risk

Preference is clean, assessment-safe planning over aggressive savings.

Asked 2 days ago in Income Tax

1) 44AD vs 44ADA (AA)

AA can’t use 44AD at ₹3.5 Cr / ₹8.5 Cr because 44AD turnover cap is ₹2 Cr (or ₹3 Cr if cash ≤5%).

44ADA is only for “specified professions” (incl. technical consultancy / information technology) with ₹50L/₹75L caps.

194J TDS doesn’t decide eligibility, but it increases “professional/technical” classification risk—keep contracts/invoicing consistent with “managed services/business delivery”.

2) FY 2025–26 (AA normal; only BB usable)

AA should be under normal taxation (44AD not available at ₹3.5 Cr).

Safest/cleanest: pay BB as employee (salary) → no GST (employee-to-employer is not supply).

If BB invoices as consultant, keep it market-linked + fully documented; related-party excess can be disallowed if “unreasonable”.

BB can use 44ADA only if her work is a specified profession and receipts stay within ₹50L/₹75L limits.

3) FY 2026–27 onward (scale planning)

AA will remain normal (turnover too high for presumptive). Income Tax Department

Avoid “splitting turnover” into BB/CC/DD just to use 44AD/44ADA unless genuinely separate businesses (separate contracts, delivery, staff, bank/GST). Main scrutiny trigger = substance.

Entity choice:

LLP: good if you want easy withdrawals—partner profit share is exempt.
- Note: 194T (10% TDS) applies on partner remuneration/interest etc. from 1 Apr 2025.

Pvt Ltd (115BAA): good if you will retain/reinvest profits; 22% + 10% surcharge + 4% cess and no MAT under 115BAA.

Shubham Goyal

CA, Delhi

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- As the turnover would cross the threshold limit prescribed u/s 44AD & 44ADA therefore presumptive taxation scheme would not applicable

- Whether the IT services provided by you is falling under the definition of notified profession or not depends on various factors and can be concluded only after review of documents and discussion

- Keep the business constitution structure as proprietorship unless creation of LLP or Pvt. Ltd. Co. is required for any other purpose other than the requirement mentioned in the question

- Payment to BB, CC and DD should be on arm length basis. All can avail benefit of 44AD or 44ADA subject to fulfillment of other conditions. You can also consider creation of HUF

- GST chargeable by BB,CC and DD would be available as Input tax credit and can be set-off against GST liability

- Below compliances would be applicable: