What is Presumptive Taxation?
A simplified tax system to give relief to small taxpayers.
No requirement for maintenance and audit of books ofaccount.
Governing sections 44AD, 44ADA, and 44AE of theIncome Tax Act, 1961.
Under presumptive taxation, the taxpayer can declareincome at a prescribed rate.
What is Presumptive Taxation?
- A simplified tax system to give relief to small taxpayers.
- No requirement for maintenance and audit of books of account.
- Governing sections 44AD, 44ADA, and 44AE of theIncome Tax Act, 1961.
- Under presumptive taxation, the taxpayer can declareincome at a prescribed rate.
For Income Tax Act
A. Presumptive Taxation Schemeu/s 44AD?
- Presumptive Taxation scheme for small businesses wherethe taxpayer can declare their income as a percentage ofgross receipts.
- Eligible assessees u/s 44AD
⚫ An individual, Hindu undivided family, or a partnershipfirm, who is a resident but not a limited liability partnershipfirm under the Limited Liability Partnership Act, 2008, and
Who has not claimed deduction under any of thesections 10A, 10AA, 10B, or 10BA or under anyprovisions of Chapter VIA under the heading
“C. – Deductions in Respect of Certain Incomes” inthe relevant assessment year;
Note: In other words, the scheme cannot be adoptedby a non-resident and by any person other than anindividual, a HUF, or a Partnership Firm (not LimitedLiability Partnership Firm).
Eligible business u/s 44AD
(i) any business except the business of plying, hiring, orleasing goods carriages referred to in section 44AE; and
(ii) whose total turnover or gross receipts in the previousyear does not exceed an amount of two crore rupees(“three crore rupees”The Finance Act, 2023 w.e.f.1-4-2024 provided the amount or aggregate of theamounts received during the previous year, in cash,does not exceed 5 percent of the total turnover or grossreceipts of such previous year)
Note: The receipt of amount or aggregate of amountsby a cheque drawn on a bank or by a bank draft, whichis not account payee, shall be deemed to be receipt incash.
Persons not eligible for Presumptive Taxation u/s 44AD.
(i)sub-section (1) of Section 44AA;
a person carrying on profession as referred to in
a person earning income in the nature of commission
or brokerage; or
(iii) a person carrying on any agency business.
Computation of Income under Section 44AD
- 8% of the turnover or gross receipts of the eligiblebusiness will be deemed to be the total (taxable)income.
- In order to promote digital transactions, income shallbe computed at the rate of 6% of turnover/grossreceipts which are received by account payee check, oraccount payee bank draft,or use of an electronichclearing system through a bank account during theprevious year or before the due date for filing of Returnof Income.
- No further deduction under the provisions of sections 30 to 38 shall be allowed.
Note: The written down value of any asset of an eligiblebusiness shall be deemed to have been calculated as ifthe eligible assessee had claimed and had been actuallyallowed the deduction in respect of the depreciation foreach of the relevant assessment years.
Consequences if a person opts out from the Presumptive Taxation scheme u/s 44 AD.
- If an eligible assessee declares profit for any previousyearaccordance with the provisions of Section 44AD,and Declares profit for any of the five assessment yearsrelevant to the previous year succeeding suchprevious year NOT in accordance with the provisions ofsub-section (1) of Section 44AD,
- He shall NOT be eligible to claim the benefit of theprovisions of this section for five assessment yearssubsequent to the assessment year relevant to theprevious year in which the profit has not been declaredin accordance with the provisions of sub-section (1) ofSection 44AD.
B Presumptive Taxation Schemeu/s 44ADA
- Presumptive taxation scheme for professionals.
- No requirement for small professionals for maintainingdetailed books of accounts.
- Eligible Assessee u/s 44ADA
- A resident individual or a partnership firm other than alimited liability partnership, and
- engaged in a profession referred to in sub-section (1) ofSection 44AA and whose total gross receipts do notexceed fifty lakh rupees in a previous year (“seventy-fivelakh rupees” by The Finance Act, 2023 w.e.f. 1-4-2024,provided the amount or aggregate of the amountsreceived during the previous year, in cash, does notexceed 5 percent of the total gross receipts of suchaprevious year).
Note:
- The receipt of an amount or aggregate of amounts by acheque drawn on a bank or by a bank draft, which isnot an account payee, shall be deemed to be the receiptin cash.
- An assessee who claims that his profits and gains fromathe profession are lower than the profits and gainsspecified in sub-section (1) of section 44ADA and whosetotal income exceeds the maximum amount which is notchargeable to income tax, shall be required to keep andmaintain such books of account and other documents asrequired under sub-section (1) of section 44AA, and getthem audited, and furnish a report of such audit asrequired under section 44AB.
Computation of Income under Section 44ADA
- Income will be computed on a presumptive basis,@50% of the total gross receipts of the profession.
- No further deduction under the provisions of Sections30 to 38 shall be allowed.
Note: The written-down value of any asset used for thepurposes of profession shall be deemed to have beencalculated as if the assessee had claimed and had beenactually allowed the deduction in respect of the depreciation for each of the relevant assessment years.
C. Presumptive Taxation u/sScheme 44AE
- Presumptive taxation scheme for assesses engaged inplying, hiring, or leasing goods carriages.
- Eligible Assessee u/s 44AE..
- An assessee engaged in the business of plying, hiring,or leasing goods carriages and owning not more than10 (ten) goods carriages at any time during the previousyear.
Computation of Income under Section 44AE
Income to be computed on an estimated basis as under:
- For heavy goods vehicles: Rs. 1,000 per ton of grossvehicle weight for every month or part of a monthduring which the heavy goods vehicle is ownedthetaxpayer.
- For vehicles other than heavy goods vehicles: Rs. 7,500per month or a part of a month during which the goodscarriage is owned by the taxpayer.
(Part of the month would be considered as full month.)
- No further deduction under the provisions of Section 30to 38 shall be allowed.
- In case where the assessee is a firm, the salary andinterest paid to its partners shall be deducted from theincome computed under sub-section (1), subject to theconditions and limits specified in clause (b) of Section 40.Note:
- The written-down value of any asset used for thepurpose of the business shall be deemed to have beencalculated as if the assessee had claimed and had beenactually allowed the deduction in respect of the depreciation for each of the relevant assessment years.
- An assessee who claims thatprofits and gains fromthe profession are lower than the profits and gainsspecified shall be required to keep and maintain suchbooks of account and other documents as requiredunder sub-section (2) of section 44AA and get themaaudited, and furnish a report of such audit as requiredunder section 44AB.
Other features of Presumptive Taxation Scheme
- Any person opting for the presumptive taxation schemeis liable to pay the whole amount of advance tax on orbefore March 15 of the previous year.
- Income tax returns (ITRs) to be filed in the simpler andashorter form ITR-4 (Sugam).
Can a higher or lower income be declared underPresumptive Taxation?
- Yes, a person may voluntarily disclose his businessincome at rates more than those prescribed underSections 44AD, 44ADA, and 44AE.
- Yes, a person can declare his income at a rate lowerthan those prescribed under Sections 44AD, 44ADA,and 44AE. However, he is then required to maintain thebooks of account and to get his accounts audited asprescribed under Section 44AA or 44AB, as the casemay be.