What is Presumptive Taxation?
Presumptive taxation scheme was introduced by the Income Tax Act, 1961 to give relief to small taxpayers from the tedious job of maintaining books of account and from getting the accounts audited.
Any individuals, HUF or partnership firms who avail presumptive taxation scheme, has to declare income at a predefined rate without going through the cumbersome task of maintaining books of accounts and audit. Three presumptive taxation schemes available to small taxpayers as per income act u/s:
- 44AD for small businesses
- 44ADA for professionals
- 44AE for businesses engaged in plying, hiring or leasing of goods carriages
Presumptive Taxation Scheme u/s 44AD
This scheme is designed to give relief to small taxpayers engaged in any business from maintaining any books of accounts (except the business of plying, hiring or leasing of goods carriages referred to in section 44AE). Income Tax Provisions for maintaining books of accounts under Section 44AA & Audit under section 44AB will not apply. Following type of assessees are eligible to avail Presumptive taxation scheme under section 44AD:
- Resident Individual
- Partnership Firm(not Limited Liability Partnership Firm)
Non Resident Indian (NRI) can not avail the benefits of this scheme. Also, a person who has made any claim towards deduction under section 10A/10AA/10B/10BA or under section 80HH to 80RRB in relevant year is not eligible for this scheme.
Eligible Business as per section 44AD:
The scheme of section 44AD is designed to give relief to small taxpayers engaged in any business except the following businesses:
- Assessee carrying on a business of plying, hiring or leasing of goods carriages referred to in section 44AE.
- An assessee who is carrying on agency business.
- An assessee who is earning any income in nature of Commission or Brokerage.
Turnover limit u/s 44AD:
To avail presumptive scheme u/s 44AD, turnover or gross receipt from the eligible business should not exceed Rs. 2 Crore (this turnover limit was Rs. 1 Crore before Budget 2016).
Computation of Income as per section 44AD:
Income is computed @ 8% of turnover or gross receipt of business for previous year. Income computed @ 8% will be the final taxable income and no further expenses will be allowed as deduction from such income. Even depreciation is not allowed to be claimed. However, the written down value (WDV) of the asset used for business will be calculated after deducting depreciation as per section 32 of the Income Tax Act.
Benefit of 44AD to partnership firms
When a partnership firm avails presumptive scheme u/s 44AD, they are allowed to claim partner’s remuneration and interest on capital as expense from the income calculated @ 8% of turnover.
Advance tax compliance u/s 44AD
Up until FY 2015-16, assessee opting for presumptive scheme were not required to pay advance tax. However, from the financial year 2016-17, even assessee’s opting for presumptive scheme will have to pay advance tax in one installment before the end of the financial year.
Presumptive Taxation Scheme u/s 44ADA for Professional
Earlier professionals were kept out of presumptive taxation scheme, but in budget 2016 the government has extended presumptive taxation scheme to the professionals as well. Hence professionals can also opt for presumptive taxation scheme under section 44ADA. This benefit is available from FY 2016-17 onwards.
Turnover limit u/s 44ADA:
To avail presumptive scheme u/s 44ADA, gross receipt from profession should not exceed Rs. 50 Lakhs
Computation of Income as per section 44AD:
50% of the professional receipts have to be shown as income as per the scheme. No further expenses will be allowed to be claimed from such income. However, an assessee can claim individual deductions under section 80.
Presumptive Taxation Scheme Under Section 44AE
The scheme of section 44AE is designed to give relief to small taxpayers engaged in the business of plying, hiring or leasing of goods carriages.
Eligible business as per section 44AE:
- A person who is engaged in the business of plying, hiring or leasing of goods carriages and who does not own more than 10 goods vehicles at any time during the year. Including carriages taken on hire purchase or no installments.
- The provisions of section 44AE are applicable to every person (i.e., an individual, HUF, firm, company, etc.).
Characteristics of the Scheme u/s 44AE:
- A taxpayer doesn’t have to maintain books of accounts under section 44AA.
- Turnover from a business should not exceed Rs. 2 Crore (Rs. 1 Crore until FY 2015-16)
- Net Income from a heavy goods vehicle will be taken as Rs. 7,500 per month for each vehicle
- A taxpayer will not be able to claim any business expenses against the income.
Part of a month shall be rounded off to the next month. For instance, if you have owned a goods carriage for 7 months and 5 days, the net income shall be calculated as if the carriage was owned for 8 months.
Yes. With effect from the Financial year 2016-17, any professional be it a doctor or a chartered accountant or a lawyer can opt for Presumptive taxation scheme u/s 44ADA. Only conditions are that the income from such a profession should not exceed Rs. 50 lakhs and profits will be taken as 50% of such professional receipts.
The scheme of section 44AD is designed to give relief to small taxpayers engaged in any business, except the following businesses:
1. Business of plying, hiring or leasing goods carriages referred to in sections 44AE.
2. A person who is carrying on any agency business.
3. A person who is earning income in the nature of commission or brokerage
4. Any business whose total turnover or gross receipts exceeds two crore rupees.