To give relief to small taxpayers from the tedious job of maintenance of books of account and from getting the accounts audited, the Income-tax Act has framed the presumptive taxation scheme under sections 44AD and section 44AE. In this part you can gain knowledge about various provisions of the presumptive taxation scheme of section 44AD and section 44AE.
Meaning of presumptive taxation scheme
As per the Income-tax Act, a person engaged in business is required to maintain regular books of account and further, he has to get his accounts audited. To give relief to small taxpayers from this tedious work, the Income-tax Act has framed the presumptive taxation scheme under sections 44AD and 44AE.
A person adopting the presumptive taxation scheme can declare income at a prescribed rate and, in turn, is relieved from tedious job of maintenance of books of account and also from getting the accounts audited.
Meaning of presumptive taxation scheme
For small taxpayers the Income-tax Act has framed two presumptive taxation schemes as given below:
1) The presumptive taxation scheme of section 44AD.
2) The presumptive taxation scheme of section 44AE.
Presumptive Taxation Scheme of Section 44AD
For whom the presumptive taxation scheme of section 44AD is designed?
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 persons who can take advantage of the presumptive taxation scheme of section 44AD
The presumptive taxation scheme of section 44AD can be adopted by following persons :
1) Resident Individual
2) Resident Hindu Undivided Family
3) Resident Partnership Firm (not Limited Liability Partnership Firm)
In other words, the scheme cannot be adopted by a non-resident and by any person other than an individual, a HUF or a partnership firm (not Limited Liability Partnership Firm).
Eligible person who can take advantage of the presumptive taxation scheme of section 44AD
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.
Businesses not covered under the presumptive taxation scheme of 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 profession as referred to in section 44AA(1)is not eligible for presumptive taxation scheme.
An insurance agent cannot adopt the presumptive taxation scheme of section 44AD
A person who is earning income in the nature of commission or brokerage cannot adopt the presumptive taxation scheme of section 44AD. Insurance agents earn income by way of commission and, hence, they cannot adopt the presumptive taxation scheme of section 44AD.
A person engaged in a profession as prescribed under section 44AA(1) 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.
A person whose total turnover or gross receipts for the year exceed Rs. 1,00,00,000 cannot adopt the presumptive taxation scheme of section 44AD
The presumptive taxation scheme of section 44AD can be optedby the eligible persons, if the total turnover or gross receipts from the business do not exceed the limit of audit prescribed under section 44AB (i.e., Rs. 1,00,00,000). In other words, if the total turnover or gross receipt of the business exceeds Rs. 1,00,00,000 then the scheme of section 44AD cannot be adopted.
Manner of computation of taxable business income under the normal provisions of the Income-tax Act, i.e., in case of a person not adopting the presumptive taxation scheme of section 44AD
Generally, as per the Income-tax Act, the taxable business income of every person is computed as follows:
| Particulars | Amount |
| Turnover or gross receipts from the business | XXXXX |
| Less : Expenses incurred in relation to earning of the income | (XXXXX) |
| Taxable Business Income | XXXXX |
Manner of computation of taxable business income under the normal provisions of the Income-tax Act, i.e., in case of a person not adopting the presumptive taxation scheme of section 44AD
For the purpose of computing taxable business income in the above manner, the taxpayers have to maintain books of account of the business. Income will be computed on the basis of the information revealed in the books of account.
The manner of computation of taxable business income in case of a person adopting the presumptive taxation scheme of section 44AD
In case of a person adopting the provisions of section 44AD, income will be computed on presumptive basis, i.e., @ 8% of the turnover or gross receipts of the eligible business for the year.
In other words, in case of a person adopting the provisions of section 44AD, income will not be computed in normal manner as discussed earlier (i.e., Turnover less Expenses) but will be computed @ 8% of the turnover.
The manner of computation of taxable business income in case of a person adopting the presumptive taxation scheme of section 44AD
Income at higher rate, i.e., higher than 8% can be declared if the actual income is higher than 8%.
The presumptive income computed @ 8% is the final income and no further expenses will be allowed or disallowed
Under the normal provisions of the Income-tax Act, taxable business income will be computed after allowing deduction in respect of expenses which are deductible as per the Income-tax Act and after disallowing expenses which are not deductible as per the Income-tax Act.
In case of a person who is opting for the presumptive taxation scheme of section 44AD, the provisions of allowance/disallowances as provided for under the Income-tax Act will not apply and income computed at the presumptive rate of 8% will be the final taxable income of the business covered under the presumptive taxation scheme. In other words, the income computed @ 8% will be the final taxable income of the business covered under the presumptive taxation scheme and no further expenses will be allowed or disallowed.
However, in case of a taxpayer, being a partnership firm, opting for the presumptive taxation scheme, from the income computed @ 8% of the turnover further deduction can be claimed on account of remuneration and interest paid to partners (computed as per the Income-tax Act).
While computing income as per the provisions of section 44AD, 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.
No need to maintain books of account as prescribed under section 44AA
Section 44AA deals with provisions relating to maintenance of books of account by a person engaged in business/profession. Thus, a person engaged in business/profession has to maintain books of account of his business/profession according to the provisions of section 44AA.
In case of a person engaged in a business and opting for the presumptive taxation scheme of section 44AD, the provisions of section 44AA relating to maintenance of books of account will not apply. In other words, if a person adopts the provisions of section 44AD and declares income @ 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 presumptive taxation scheme of section 44AD.
No need to pay advance tax in respect of income from business covered under section 44AD
A person opting for the presumptive taxation scheme of section 44AD will not be liable to pay advance tax in respect of income from business covered under section 44AD.
Provisions to be applied if a person does not opt for the presumptive taxation scheme of section 44AD and declares income at a lower rate, i.e., at less than 8%
A person can declare income at lower rate (i.e., at less than 8%), 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
Applicability of the 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 of goods carriages.
Eligible taxpayer and eligible business for the purpose of the presumptive taxation scheme of section 44AE
The provisions of section 44AE are applicable to every person (i.e., an individual, HUF, firm, company, etc.).
The presumptive taxation scheme of section 44AE can be adopted by 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.
A person who owns more than 10 goods vehicles cannot adopt the presumptive taxation scheme of section 44AE
The presumptive taxation scheme of section 44AE can be adopted by 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.
The important criterion of the scheme is the restriction on owning of 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.
The manner of computation of taxable business income in case of a person adopting the presumptive taxation scheme of section 44AE
In case of a person who is willing to opt for the presumptive taxation scheme of section 44AE, income will be computed on an estimated basis.
Income will be computed @ Rs. 7,500 per month or part thereof during which the goods vehicle is owned by the taxpayer during the year. Part of the month would be considered as full month.
Note: If the actual income is higher than the presumptive rate, i.e., higher than Rs. 7,500, then such higher income can be declared.
Illustration for better understanding
Mr. Khush is engaged in the business of plying, hiring or leasing of goods carriage. Throughout the year 2014-15 he owned 9 goods vehicles (5 heavy goods vehicles and 4 other than heavy goods vehicles). What will be the taxable income from the business of plying, hiring or leasing of goods carriages if he adopts the provisions of section 44AE?
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As per the provisions of section 44AE,income will be computed @ Rs. 7,500 per month or part thereof during which the goods vehicle is owned by the taxpayer. The rate of Rs. 7,500 per month is same for every goods vehicle.
In the present case, Mr. Khush owned 9 goods vehicles throughout the year and, hence, income will be computed as follows:
| Particulars | Amount (Rs.) |
| Income per month per goods vehicle | 7,500 |
| (×) No. of goods vehicles | 9 |
| Monthly income as per the provisions of section 44AE from 9 goods vehicles | 67,500 |
| (×) No. of months in the year during which the vehicles were owned | 12 |
| Total income from business of plying, hiring or leasing goods carriages as per the provisions of section 44AE | 8,10,000 |
The presumptive income computed at the rate of Rs. 7,500 per goods vehicle per month is the final income and no further expenses will be allowed or disallowed
Under the normal provisions of the Income-tax Act, taxable business income will be computed after allowing deduction in respect of expenses which are deductible as per the Income-tax Act and after disallowing expenses which are not deductible as per the Income-tax Act.
In case of a person who is opting for the presumptive taxation scheme of section 44AE, the provisions of allowance/disallowances as provided for under the Income-tax Act, will not apply and income computed at the presumptive rate of Rs. 7,500 per goods vehicle per month will be the final income. In other words, the income computed at the rate of Rs. 7,500 per goods vehicle per month will be the final taxable income of the business and no further expenses will be allowed or disallowed.
However, in case of a taxpayer, being a partnership firm, opting for the presumptive taxation scheme, from the income computed at the rate of Rs. 7,500 per goods vehicle per month, further deduction can be claimed on account of remuneration and interest paid to partners (computed as per the Income-tax Act).
While computing income as per the provisions of section 44AE, 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.
No need to maintain books of account as prescribed under section 44AA
Section 44AA of the Income-tax Act, 1961 has provisions relating to maintenance of books of account by a person engaged in business/profession. Thus, a person engaged in business/profession has to maintain books of account of his business/profession according to the provisions of section 44AA.
No need to maintain books of account as prescribed under section 44AA
In case of a person opting for the presumptive taxation scheme of section 44AE, the provisions of section 44AA relating to maintenance of books of account will not apply. In other words, if a person adopts the provisions of section 44AE and declares his income at the rate of Rs. 7,500 per goods vehicle per month, then he is not required to maintain the books of account as provided for under section 44AA in respect of business covered under the presumptive taxation scheme of section 44AE.
There is no concession as regards payment of advance tax in case of a person who adopts the presumptive taxation scheme of section 44AE and, hence, he will be liable to pay advance tax even if he adopts the presumptive taxation scheme of section 44AE.
Provisions to be applied if a person does not opt for the presumptive taxation scheme of section 44AE and declares income at a lower rate, i.e., at less than Rs. 7,500 per goods vehicle per month
A person can declare his income at lower rate (i.e., at less than Rs. 7,500 per goods vehicle per month). However, if he does so, then he is required to maintain the books of account as per the provisions of section 44AA and has to get his accounts audited under section 44AB.
