Presumptive Taxation

Ultimate guide on presumptive taxation – section 44AD, 44ADA and 44AE

Last updated on February 3, 2018

Introduction

Presumptive taxation scheme – section 44AD, 44ADA and 44AE – was introduce to provide some relief to small business owners from maintenance of books of account and from audit.

It is called presumptive taxation scheme because under this scheme, the income of the taxpayer is estimated at certain percentage of the turnover. In addition, presumption is made that all the expenses incurred by the taxpayer related to his business have already been claimed. Finally, it is at this income, tax is levied.

Meaning

Under presumptive scheme, income is computed at the prescribed rate and the taxpayer is relieved from audit and maintenance of books of account. It is especially designed for small taxpayers so that they can file their return and pay their taxes hassle free. The most important benefit of opting these schemes is that taxpayer is exempted from maintenance of books of accounts as per section 44AA of the Act.

Presumptive taxation scheme spreads into three sections of Income Tax Act, 1961:

  • Section 44AD – Special provision for computing profits and gains of business on presumptive basis.
  • Section 44ADA – Special provision for computing profits and gains of profession on presumptive basis.
  • Section 44AE – Special provision for computing profits and gains of business of plying, hiring and leasing of goods carriages.

We will discuss them one by one.

Section 44AD – Profits and gains of business on presumptive basis

Applicability

#1. Presumptive taxation scheme under section 44AD is applicable to all small taxpayer engaged in any business but not in the business of plying, hiring or leasing of goods carriages.

#2. This scheme is not applicable to any person carrying out agency business as well as any person earning income from commission and brokerage business.

#3. Only following persons can opt for this scheme: a) Resident Individual b) Resident Hindu Undivided Family and c) Resident Partnership Firm (not LLP).

#4. This section does not apply to person providing profession services (covered in section 44ADA later in this post)

#5. A person whose total turnover or gross receipts exceeds ₹ 2 Crore cannot adopt presumptive taxation scheme under section 44AD. If turnover exceeds ₹ 2 Crore, then income will be computed under normal provisions of the act (i.e. Revenue – Expenses) and accounts will have to be audited under section 44AB.

#6. If a taxpayer has claimed deductions under section 10A/10AA/10B/10BA or under sections 80HH to 80RRB during the year, then he cannot adopt this scheme.

Manner of Computation of income under section 44AD

Under this presumptive scheme, income will be presumed to be 8% of the total turnover or gross receipts of the business during the year. Income Tax will be paid on this income. (All the expenses, which are incurred for the business, shall be deemed to have been already claimed).

Further, in order to promote the acceptance of digital transactions, an amendment has been made by the Finance Act, 2017 w.e.f. 01-04-2017. It provides that, in respect of turnover / gross receipts that is received through digital mode i.e. cheque, bank draft, NEFT, RTGS, IMPS, Debit/Credit Cards, income will be computed at the rate of 6% of the total turnover or gross receipts of the business during the year.

Therefore, for all payments received electronically, profits will be presumed to be 6% of such payments and for all other payments, 8% of such payments.

[Note: A person may voluntarily disclose business income higher than the prescribed rate of 8% or 6%, as the case may be]

Consequences, if person opts out from the presumptive taxation of section 44AD

If a person opts for presumptive taxation scheme under section 44AD, it needs to be followed consecutively for five assessment years and failure to do so will make the person ineligible for this scheme for next five assessment years.

For instance, you as a taxpayer opts for presumptive scheme for A.Y. 2017-18 and A.Y. 2018-19 but in A.Y. 2019-20, you did not opt for presumptive taxation scheme. Then, you will not be eligible to claim the benefits of this scheme from A.Y. 2020-21 to A.Y. 2024-2025. Furthermore, you will have to maintain books of accounts and get them audited as per section 44AB.

Section 44ADA – Profits and gains of profession on presumptive basis

The presumptive taxation scheme of section 44ADA is applicable to all small taxpayers engaged in giving professional services whose total gross receipts does not exceed ₹ 50 Lakhs in a financial year. This scheme is introduced from F.Y. 2016-17 vide Finance Act, 2016.

The person resident of India engaged in following profession is eligible to take benefit of scheme under section 44ADA:

  • Legal
  • Medical
  • Engineering or Architectural
  • Accountancy
  • Technical Consultancy
  • Interior Decoration
  • Any other profession as notified by CBDT

Manner of Computation of income under section 44ADA

Under this presumptive scheme, income will be presumed to be 50 % of the total gross receipts of the profession during the year. Income Tax will be paid on this income. (All the expenses, which are incurred for the business, shall be deemed to have been already claimed).

[Note: A person may voluntarily disclose business income higher than the prescribed rate of 50% of total gross receipts]

If the taxpayer claims that his income from profession is less than 50% of the total gross receipts and his income exceeds the basic exemption limit, then he has to maintain books of accounts as per section 44AA(1) and get those books audited as per section 44AB.

Recommended Read : 45 Legal ways to Save Tax in India other than 80C

Section 44AE – Profits and gains of business of plying, hiring and leasing of goods carriages

The presumptive taxation scheme of section 44AE is applicable to all small taxpayers engaged in the business of plying, hiring and leasing of goods carriages who does not own more than 10 goods carriages/vehicles at any time during the year. In other words, a person who owns more than 10 goods carriages/vehicles cannot adopt the presumptive taxation scheme of section 44AE.

The provisions of the section 44AE are applicable to every person i.e. an individual, HUF, partnership firm, company etc.

Manner of Computation of income under section 44AE

#1. Under this presumptive scheme, income is computed as follows

i) Light Goods Vehicle (Less than 12MT Gross Vehicle Weight  –  ₹ 7,500 per vehicle per month or part of the month.

ii) Heavy Goods Vehicle (More than 12MT Gross Vehicle Weight – ₹ 1,000 per ton per vehicle per month or part of the month. (Applicable from Assessment Year 2018-19) (All the expenses, which are incurred for the business, shall be deemed to have been already claimed).

#2. If the vehicle is owned for part of the month and not for the full month, then this period will be considered as full month and income of ₹ 7,500 will be deemed for that part month as well

#3. If the taxpayer is a partnership firm, further deduction of salary and interest paid to partners can be claimed from the income (computed as per income tax law).

#4. If the taxpayer claims that his income from profession is less than ₹ 7,500 per vehicle per month and his income exceeds the basic exemption limit, then he has to maintain books of accounts as per section 44AA(2) and get those books audited as per section 44AB.

[Note: A person may voluntarily disclose business income higher than the prescribed rate of ₹ 7,500 per vehicle per month]

Advance Tax Provisions for section 44AA, 44ADA and 44AE

Any person adopting presumptive taxation schemes of section 44AD and 44ADA has been given concession in paying advance tax and has to pay 100 % of the tax applicable on or before 15th March of the financial year. However, if he fails to do so, he will be liable to pay interest under section 234C.

In case of presumptive taxation scheme under section 44AE, all the normal provisions of advance tax are applicable and no concession is granted.

Pratik Gelda

I'm a qualified Chartered Accountant and I love to write about economics, finance, taxation and investments. My aim is to make my readers economically literate and financially independent

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