The Income Tax Act contains a scheme which is known as the ‘Presumptive Taxation Scheme’. This scheme was introduced to provide relief to the small taxpayers from the preparation and maintenance of books of accounts and from auditing the books of accounts.

The presumptive taxation scheme is very easy to comply with and very easy to understand. Under this scheme, the small taxpayers are not required to prepare & maintain their books of accounts and they will calculate their profit on a presumptive basis. Under the Income Tax Act, section 44AD, 44ADA, and section 44AE will explain such a presumptive taxation scheme.

PRESUMPTIVE TAXATION- SECTION 44AD

Meaning of Presumptive Taxation Scheme– As per the provision of Income Tax Act 1961, the person who are doing business or profession, they are required to maintain their books of accounts and such books of accounts, are required to be audited. To provide relief to the small taxpayer, Income Tax Act introduces the Presumptive Taxation Scheme under sections 44AD, 44ADA, and section 44AE. The person who adopts such a scheme is required to compute the amount of income on an estimated basis and make the payment of tax at a minimum rate.

Who are eligible for Presumptive Taxation Scheme

Such scheme can be adopted by the following persons-

  • Resident Individual
  • Resident Hindu Undivided Family
  • Resident Partnership Firm (LLP cannot use such scheme)

Eligibility for Presumptive Taxation

For such scheme, the assessee must satisfies the following conditions-

  • The assessee can not claim the deduction under sections 10A, 10AA, 10B, 10BA, 80HH to 80RRB.
  • The assessee should not be engaged in any specified profession and business.

Specified professions and businesses are

  1. Business of plying, hiring, or leasing of goods carriage.
  2. The person earning income by the way of brokerage, and commission.

The person who is doing agency business.

  1. Other professions are- legal, engineering, architectural, accountancy, medical, technical consultancy, interior decoration, authorized representative, film artist, information technology, and company secretary services.

Presumptive Taxation Scheme For Small & Medium Enterprises (SMEs)

Section 44AD can be adopted by the person whose amount of turnover is less than and up to 2crore i.e. if the amount of turnover is more than 2crore then such person cannot adopt such scheme. If the turnover is less than 2crore then the income to be presumed to be 8% of total turnover.

If the assessee is calculating the income as per section 44 AD, he will not be eligible to claim any expenses and depreciation.

To promote digitalization, the government decided to provide several incentives to the businesses that are receiving the payment digitally. One incentive (with effect from the assessment year 2017-18) is that if the person receives all the payment from digital form, he can claim his income to be 6% (in the place of 8%) of total payment which is received digitally.

  • The person, who is adopting the provision of section 44AD, is required to make the payment of the whole amount of Advance Tax on or before the 15th day of March of the previous year. If such person does not make the payment of such advance tax on or before 15th March, will be liable to pay interest under section 243C.
  • If there is any person who is declaring the amount of income at a lower rate (less than 6% or 8%) and the income of such person is more than the income which is chargeable to tax, then such person will maintain its books of accounts as per the provision of section 44AA and such books are required to be audited as per section 44AB.
  • If any person adopts a presumptive taxation scheme, such person needs to carry this scheme for the next 5 years. If such a person fails to do so, then such scheme will not be available for the next 5 years.

PRESUMPTIVE TAXATION- SECTION 44ADA

Section 44ADA is introduced to provide relief to the small taxpayer who is engaged in the specified professions.

Such scheme is available for the person who is engaged in the following professions-

  1. Medical
  2. Legal
  3. Accountancy
  4. Interior Decoration
  5. Technical Consulting
  6. Engineering
  7. Architectural
  8. Any other profession as notified by the CBDT

Eligibility for Presumptive Taxation under section 44ADA

Such scheme is available only for the-

  1. Individual
  2. Partnership Firm (Other than LLP)

How to compute taxable income as per section 44ADA

This scheme is also available for the professional whose amount of gross receipt from the profession is not more than 50 lakh in the financial year. 50% of such gross receipt will be considered as profit and it will be taxable under ‘Profit and Gains of Business and Profession (PGBP)’ head. The assessee who is calculating the income as per section 44AD, will not be eligible to claim any expenses and depreciation.

  • The person, who is adopting the provision of section 44ADA, will make the payment of the whole amount of Advance Tax on or before the 15th day of March of the previous year. If such person fails to make the payment of such advance tax on or before 15th March, will be liable to pay interest under section 243C.
  • The person who is adopting the provision of section 44 ADA, will not require to maintain the books of accounts.
  • If there is any person who is declaring the amount of income at a lower rate (less than 50%) and the income of such person is more than the income which is chargeable to tax, then such person will maintain its books of accounts as per the provision of section 44AA and such books are required to be audited as per section 44AB.

PRESUMPTIVE TAXATION- SECTION 44AE

Section 44AE is introduced to provide relief to the small taxpayer who is engaged in the business of plying, hiring, or leasing of goods carriages.

Who are eligible– Such scheme is available for-

  1. Individual
  2. HUF
  3. Partnership Firm
  4. Company etc.

This scheme can be adopted by any person who is engaged in the business of plying, hiring or leasing of goods carriages and who has not more than 10 own goods vehicles at the time during the year I.e. if any person has more than 10 own goods vehicles at the time during the year, will not be eligible for such scheme.

The person, who will adopt such a scheme, will calculate the income on an estimated basis in the following manners-

  1. For Heavy Vehicles- Rs.1000 per ton of gross vehicle weight for every month or part of the month.
  2. For Other Vehicles- Rs. 7500 per ton of gross vehicle weight for every month or part of the month.

The assessee who is calculating the income as per section 44 AD, will not be eligible to claim any expenses and depreciation.

The person who is opting for the provision of section 44 AE, do not require to maintain the books of accounts.