In order to give relief to 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..
For small taxpayers the Income-tax Act has framed Three 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 Crore.
Extended Turnover Limit is Rs. 3 Crore From FY 23-24, if-
- Cash Receipt is less than 5% of Total Receipt
- Cash Payment is less than 5% of Total Payment
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)
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 given limit of Rs. 2 Crore or Extended Limit Rs. 3 Crore, then the scheme of section 44AD cannot be adopted
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
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.
Minimum 6% Profit
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).
Minimum 8% Profit
if turnover/gross receipt is received in Cash or any other Mode other than above
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
As an example,
Laxmi Traders has gross receipts of Rs 1.5 crore for financial year 2020-2021 but does not keep books of accounts. Presumptive taxation has been chosen by Laxmi traders. Laxmi Traders received Rs. 70 lakhs in non-digital transactions (cash payments) and Rs. 80 lakhs in digital transactions during the year.
What is the expected income under the headings business and profession?
The solution.
Earnings from business and profession:
70,00,000 * 8% = Rs. 5,60,000 for non-digital transactions
80,00,000 * 6% = Rs. 4,80,000 for digital transactions
The income under the category of “Business or Profession” will be Rs 10,40,000.
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 benefit of Presumptive Taxation, which was previously only available to certain businesses, has now been extended to Professionals. Professionals whose total gross receipts do not exceed Rs. 50 lakhs in a fiscal year can claim the benefit of this Section.
Extended Gross Receipt Limit is Rs. 75 Lakh from FY 23-24, if-
- Cash Receipt is less than 5% of Total Receipt
- Cash Payment is less than 5% of Total Payment
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
As an example,
Mina is a professional interior designer. For the financial year 2023-24, she earned a total of Rs 20 lakhs from her profession.
Minimum Profit to be declared is 50% i.e Rs. 10 Lakh under PGBP Head.
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
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.
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
