Presumptive Taxation Scheme

In order to make tax filing simpler for small businessmen and professionals, the presumptive taxation scheme was introduced. Under this scheme, the taxpayer is not required to maintain books of accounts. Instead, the taxpayer’s income is calculated presumptively, provided the taxpayer’s turnover is below a stipulated limit.

Presumptive Taxation Scheme

As per the Income-tax Act, 1961, businessmen and professionals must maintain regular books of accounts. They must also get their accounts audited and file income tax returns (ITRs). However, in order to give relief to small taxpayers from the tedious job of maintaining regular books of account and getting them audited, income tax law has introduced a presumptive taxation scheme. For small taxpayers the Income-tax Act has framed two presumptive taxation schemes as given below:

The presumptive taxation scheme of section 44AD
The presumptive taxation scheme of section 44ADA
The presumptive taxation scheme of section 44AE

Presumptive Taxation Scheme of Section 44AD

The presumptive taxation scheme of section 44AD is designed to give relief to small taxpayers engaged in any business (except the business of plying, hiring or leasing of goods carriages referred to in section 44AE.

Eligible Taxpayer

The presumptive taxation scheme of section 44AD can be opted by the eligible persons if the total turnover or gross receipts from the business do not exceed Rs. 2,00,00,000. The presumptive taxation scheme of section 44AD can be adopted by the following persons:

Resident Individual
Resident Hindu Undivided Family
Resident Partnership Firm (not Limited Liability Partnership Firm)

Non-Applicability

The scheme cannot be adopted by a non-resident and by any person other than an individual, a HUF, or a partnership firm (not a Limited Liability Partnership Firm).
This scheme cannot be adopted by a person who has made any claim towards deductions under section 10A/10AA/10B/10BA or under sections 80HH to 80RRB in the relevant year.
A person who is earning income in the nature of commission or brokerage (insurance agent) cannot adopt the presumptive taxation scheme of section 44AD
A person who is engaged in any profession as prescribed under section 44AA(1) cannot adopt the presumptive taxation scheme of section 44AD

Businesses not covered under section 44AD

The scheme of section 44AD is designed to give relief to small taxpayers engaged in any business, except the following businesses:

Business of plying, hiring, or leasing of goods carriages referred to in section 44AE
A person who is carrying on any agency business
A person who is earning income in the nature of commission or brokerage
Apart from above discussed businesses, a person carrying on a profession as referred to in section 44AA (1)is not eligible for a presumptive taxation scheme.
If the total turnover or gross receipt of the business exceeds Rs. 2,00,00,000 then the scheme of section 44AD cannot be adopted

Computation of taxable business income

In the case of a person adopting the provisions of section 44AD, income is computed on the presumptive basis at the rate of 6% or 8%, of the turnover or gross receipts of the eligible business for the year. To promote digital transactions and to encourage small unorganized businesses to accept digital payments, section 44AD is amended with effect from the assessment year 2017-18 to provide that income shall be computed at the rate of 6% instead of 8% if turnover/gross receipt is received by an account payee cheque or an account payee bank draft or use of electronic clearing system through a bank account or through such other electronic mode as may be prescribed during the previous year or before the due date of filing of return under section 139(1). The income computed as per the prescribed rate will be the final taxable income of the business covered under the presumptive taxation scheme and no further expenses will be allowed or disallowed

Maintenance of books of account

if a person adopts the provisions of section 44AD and declares income @ 6% or 8% of the turnover, then he is not required to maintain the books of account as provided for under section 44AA in respect of business covered under the scheme of section 44AD

Payment of advance tax

Any person opting for the presumptive taxation scheme under section 44AD is liable to pay the whole amount of advance tax on or before 15th March of the previous year. If he fails to pay the advance tax by 15th March of the previous year, he shall be liable to pay interest as per section 234C Note: Any amount paid by way of advance tax on or before the 31st day of March shall also be treated as advance tax paid during the financial year ending on that day.

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

If a person opts for a presumptive taxation scheme then he is also required to follow the same scheme for the next 5 years. If he failed to do so, then a presumptive taxation scheme will not be available for him for the next 5 years. Further, he is required to keep and maintain books of account and he is also liable for tax audit as per section 44AB from the AY in which he opts out from the presumptive taxation scheme

Presumptive Taxation Scheme of Section 44ADA

The presumptive taxation scheme of section 44ADA is designed to give relief to small taxpayers engaged in a specified profession.

Eligible taxpayer

A person resident in India engaged in the following professions can take advantage of the presumptive taxation scheme of section 44ADA

Legal
Medical
Engineering or architectural
Accountancy
Technical consultancy
Interior decoration
Any other profession as notified by CBDT

The Finance Act, 2021 has amended provisions of section 44ADA to define eligible assessee. With effect from Assessment Year 2021-22, the benefit of section 44ADA is eligible only for the following assessee:

Individual
Partnership firm other than a Limited Liability Partnership as defined under clause (n) of sub-section (1) of section 2 of Limited Liability Partnership Act, 2008

Computation of taxable income

In the case of a person adopting the provisions of section 44ADA, income will be computed on a presumptive basis, i.e. @ 50% of the total gross receipts of the profession. However, such a person can declare income higher than 50%

A person who adopts the presumptive taxation scheme is deemed to have claimed all deduction of expenses. Any further claim of the deduction is not allowed after declaring profit @ 50%.
While computing income as per the provisions of section 44ADA, separate deduction on account of depreciation is not available. However, the written down value of any asset used in such business shall be calculated as if depreciation as per section 32 is claimed and has been actually allowed

Payment of advance tax

Any person opting for the presumptive taxation scheme under section 44ADA is liable to pay the whole amount of advance tax on or before 15th March of the previous year. If he fails to pay the advance tax by 15th March of the previous year, he shall be liable to pay interest as per section 234C

Maintenance of books of account

If a person opts for the provisions of section 44ADA and declares income @50% of the gross receipts, then he is not required to maintain the books of account in respect of the specified profession Note: A person can declare income at a lower rate (i.e. less than 50%), however, if he does so, and his income exceeds the maximum amount which is not chargeable to tax, then he is required to maintain the books of account as per the provisions of section 44AA and has to get his accounts audited as per section 44AB.

Presumptive Taxation Scheme of Section 44AE

The scheme of section 44AE is designed to give relief to small taxpayers engaged in the business of plying, hiring, or leasing goods carriages

Eligible taxpayer

The provisions of section 44AE are applicable to every person:

Individual
HUF
Firm
company

Eligible business

Eligibility Criteria

The presumptive taxation scheme of section 44AE can be adopted by a person who is engaged in the business of plying, hiring, or leasing goods carriages and who does not own more than 10 goods vehicles at any time during the year. The important criterion of the scheme is the restriction on owning not more than 10 goods vehicles at any time during the year. Thus, if a person owns more than 10 goods vehicles at any time during the year, then he cannot take advantage of this scheme.

Computation of taxable income

In the case of a person who is willing to opt for the scheme of section 44AE, income will be computed on an estimated basis

For Heavy Goods Vehicle, income will be computed at the rate of Rs. 1,000 per ton of gross vehicle weight for every month or part of a month during which the heavy goods vehicle is owned by the taxpayer.
In the case of vehicles other than heavy goods vehicles, income will be computed at the rate of 7,500 for every month or part of a month during which the carriage of the goods is owned by the taxpayer. Part of the month would be considered a full month.

Note 1:

If the actual income is higher than the presumptive rate, i.e., higher than Rs. 1,000/Rs. 7,500, then such higher income can be declared.
“Heavy Goods Vehicle” means any goods carriage having a gross vehicle weight exceeding 12,000 kilograms