Presumptive Taxation Scheme

What is Presumptive Taxation Scheme?

Income Tax Law makes a mandatory requirement for businesses and professionals to maintain books of accounts as per Section 44AA. To provide a relief to small taxpayers from this tedious job, the Income-tax Act has framed the presumptive taxation scheme under sections 44AD, sections 44AE and sections 44ADA.

A person opting presumptive taxation scheme will get a relaxation from tedious job of maintenance of books of account and can declare income at a prescribed rate.

There are three presumptive taxation schemes as given below:

1.Section 44AD: For Computing Profits & Gains of Business on Presumptive Basis. Such business can be owned by an individual (proprietorship), HUF or a traditional Partnership firm (excluding Limited Liability Partnerships).

2.Section 44AE: For Computing Profits and Gains of Business of Plying, Hiring or Leasing Goods Carriages:

3.Section 44ADA: For computing Profits and Gains of Profession on presumptive basis

Eligibility to take the advantage of Presumptive Taxation Scheme

The scheme under presumptive taxation of Section 44AD can be used by following entities:

1) A Resident Individual; or
2) A Resident Hindu Undivided Family; or
3) A Resident Partnership Firm (excluding Limited Liability Partnership Firm)

In other words, the presumptive taxation scheme under Section 44AD cannot be adopted by non-resident entities, companies or limited liability partnerships.

Moreover, the presumptive taxation scheme cannot be used by any person who has undertaken deductions under section 10A/10AA/10B/10BA or under sections 80HH to 80RRB in the same year.

Conditions for opting Presumptive Taxation Scheme

  • Once the presumptive taxation scheme has been opted by the assessee, he is required to file Income tax return as per the presumptive taxation scheme only for a period of 5 years. This has been set by the government to discourage the misuse of presumptive taxation scheme.
  • In case a taxpayer has filed the return as a normal taxpayer under presumptive taxation scheme or opted out of presumptive taxation scheme, then he cannot opt for the presumptive taxation scheme for the next 5 years.
  • Unlike as in Section 44AD for businesses, a professional can opt in and out from the scheme at anytime without the 5years restriction.

Section 44AD: For Computing Profits and Gains of Business on Presumptive Basis

  • The scheme shall be applicable to individuals, HUF’s and partnership firms excluding Limited Liability Partnership Firms. The scheme of presumptive taxation is applicable for any business, which has maximum gross sales or turnover or gross receipts of Rs. 2 crore.
  • The presumptive rate of net income is prescribed at 8% of gross turnover/gross receipts (6% in case of digital receipts).
  • An assessee who opts for presumptive taxation scheme, shall be exempted from maintenance of books of accounts related to such business as required u/s 44AA of the Income Tax Act.
  • An assessee may have gross sales/ turnover less than Rs. 2 crore, but show a net income below the presumptive rate of 8% or 6% (where applicable). In such a case, the assessee will need to maintain books of accounts (if such an assessee falls in any tax bracket and also get them audited.
  • The assessee cannot deduct any business expenses against the income under presumptive taxation scheme.
  • Section 44AD shall not apply to-

I. A person carrying on profession;
II. A person having income from commission or brokerage; or
III. A person carrying on agency business

  • Once the presumptive taxation scheme u/s 44AD has been opted by the assessee, he is required to file Income tax return under the presumptive taxation scheme only for a period of 5 years.
  • In case a taxpayer has filed the return as a normal taxpayer under presumptive taxation scheme or opted out of presumptive taxation scheme, then he cannot re-opt for the presumptive taxation scheme for the next 5 years.
  • ITR 4 would be applicable under this.

Section 44AE: For Computing Profits and Gains of Business of Plying, Hiring or Leasing Goods Carriages

  • In case of an assessee who owns not more than 10 goods carriages or heavy goods vehicles during the previous year and is engaged in the business of plying, hiring or leasing such goods carriages, then the income of such business is taxable under the head “Profits and gains from Business& Profession”, your net income from goods carriage shall be assumed as Rs. 7,500 per month or part of a month for each Light Goods vehicle and Rs.1,000 per ton per vehicle per month for Heavy Goods Vehicle (Budget 2018- Applicable for FY 2018-19).
  • The assessee cannot deduct any business expenses against the income.
  • The scheme shall be applicable to individuals, HUF’s and partnership firms excluding Limited Liability Partnership Firms
  • An assessee who has possession of a goods carriage, whether taken on hire purchase or on instalments basis and for which the whole or part of amount is still due, shall be deemed to be the owner of that goods carriage.
  • Once the presumptive taxation scheme u/s 44AE has been opted by the assessee, he is required to file Income tax return under the presumptive taxation scheme only for a period of 5 years.
  • In case a taxpayer has filed the return as a normal taxpayer under presumptive taxation scheme or opted out of presumptive taxation scheme, then he will be ceased to opt for benefit of presumptive taxation scheme for the next 5 years.
  • ITR 4 would be applicable under this.

Section 44ADA: For Computing Profits and Gains of Profession on Presumptive Basis

  • The benefit of presumptive taxation scheme was earlier given to Businesses, which has now extended to Professionals also. Thus, Professionals whose Gross Receipts are not more than Rs. 50 Lakhs in a financial year, can enjoy the benefit of presumptive taxation u/s 44ADA from FY 2016-17.
  • The scheme shall be applicable to individuals, HUF’s and partnership firms excluding Limited Liability Partnership Firms.
  • The Persons engaged in the below mentioned profession can opt for this presumptive taxation scheme u/s 44ADA and net income of such person would be assumed to be 50% of the gross receipts for the relevant financial year:
  1. Legal
  2. Engineering
  3. Medical
  4. Architectural Profession
  5. Accountancy Profession
  6. Technical Consultancy
  7. Interior Decoration
  8. Authorized representatives
  9. Film Artists
  10. Certain Sports related person
  11. Company Secretaries
  12. Information Technology
  • An assessee who opts for this presumptive scheme, shall be exempted from maintenance of books of accounts.
  • The assessee cannot deduct any business expenses against the income under presumptive taxation scheme.
  • However, an assessee would be required to prepare books of accounts u/s 44AA and get his accounts audited, in case the assesse claims that profits and gains are less than 50% of gross receipts.
  • Unlike as in Section 44AD for businesses, a professional can opt in and out of the scheme at anytime without the 5years restriction.
  • ITR 4 would be applicable under this.

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