CA Manish Kankani

CA Manish Kankani

To reduce the tax burden and to provide relief from tedious work to small tax assessees, the government of India has incorporated a scheme of presumptive taxation. Businesses adopting the presumptive taxation scheme are not required to maintain regular books of account. They can declare the income at a prescribed rate.

The presumptive taxation scheme is framed under Three sections-Section 44AD and Section 44ADA & Section 44AE of the Income Tax Act, 1961. Person adopting presumptive taxation schemes are exempt from getting their books of account audited.

Eligibility Criteria to avail the Benefits of Presumptive Taxation Scheme under Section 44AD

Following types of tax assesses can adopt the provisions of presumptive taxation scheme Under Section 44AD :

  • Resident Individual tax payers
  • Hindu Undivided Families
  • Partnership Firm (except LLP or Limited Liability Partnership Firm)

Section 44AD Limits

  • The firm or individual’s gross receipt or annual turnover in the previous year should not have exceeded Rs. 2 crores.
  • Any firm or a person who has not claimed tax deduction under the Sections 10A, 10AA, 10B, 10BA during the assessment year can adopt the provisions of Section 44AD.  Same applies for the individuals or firms who have not claimed deductions under Section 80HH to 80 RRB.
  • There are small businessmen who are unable to keep and maintain books of accounts for various reasons, can opt for presumptive taxation and declare profits at 8% under section 44AD of Income Tax Act.  When the amount of total turnover or gross receipts are received by an account payee cheque or a bank draft or use of electronic clearing system through a bank account, the assessee can declare profits at 6%.

For example, Mr. Lokesh is running a stationary shop whose turnover is Rs. 80 lakh for the previous year. As per the provisions of Section 44AD, income will be computed on the basis of estimation at the rate of 8%/6% of gross receipts or total turnover of the eligible business for the previous year. In this case, his annual presumptive tax will be Rs. 6.4 lakhs (i.e. 8% of 80 lakh) or Rs 4.8 lakhs (i.e 6% of 80 lakhs).

Opting in for the Scheme under Section 44AD

Once a taxpayer opts for this scheme than it would be beneficial for him to file his next 5 year’s income tax return in the same scheme only.

Eligibility Criteria to avail the Benefits of Presumptive Taxation Scheme under Section 44AE

The business of plying, hiring or leasing goods carriage vehicles are eligible for Presumptive Taxation Scheme provided the assessee do not owns more than 10 such carriage vehicles at any time during the previous year. So, there are only 2 important criteria for eligibility as mentioned above:

1. Business of plying, hiring and leasing goods carriage. This means that if an assessee is engaged in the business of passenger carrying vehicles or passenger transport cannot opt for such scheme.

2. Owning not more than 10 goods carriage vehicles. It means that a person or an assessee owning more than 10 such vehicles cannot opt for such scheme.

Section 44AE Limits

Income for such eligible assessee opting for Presumptive Taxation Scheme shall be calculated on estimated basis as explained below:

  • The net total taxable income for such business shall be calculated at the rate of ₹ 7,500/- per vehicle per month or part thereof during the year in which the vehicle is owned by the assessee.
  • However, the calculation above shall be irrespective of the fact whether it is a light goods vehicle (less than or equal to 12MT) or a heavy goods vehicle (more than 12MT).
  • Also, it should be noted that part of the month shall be considered full month for the purpose of calculating income under the said section.
  • The income calculated above shall be the net income of the assessee and no expense in any case shall be allowed as deduction.

For example: – Mr. XYZ is engaged in the business of plying, hiring and leasing goods carriage vehicles. He owns 9 light goods vehicles for the purpose of transportation of goods.

Computation of Income as per Section 44AE
Income per month per goods vehicle 7500
(x) number of vehicles 9
Total income per month 67,500
(x) number of months the vehicles were owned 12
Total income for the year u/s 44AE 8,10,000

Amendments to Section 44AE in Union Budget 2018

From 1st April, 2018, i.e. for financial year 18-19, the following provision for the calculation of taxable income under section 44AE shall be applicable.

  • For light goods vehicle (less than or equal to gross weight of 12MT) – ₹ 7,500/- per vehicle per month (part thereof shall be considered full month).
  • For heavy goods vehicle (more than gross weight of 12MT) – ₹ 1,000/- per ton per vehicle per month (part thereof shall be considered full month).

Eligibility Criteria to avail the Benefits of Presumptive Taxation Scheme under Section 44ADA.

The following are the professionals, who are eligible to opt for Presumptive Taxation Scheme under Section 44ADA:

  • Engineering
  • Legal
  • Architectural profession
  • Accountant
  • Medical
  • Technical consultant
  • Interior business
  • Other notified professionals such as authorized representatives, film artists, certain sports-related persons, company secretaries and information technology

Note: This is applicable only to a resident who is an Individual, HUF or Partnership but not a Limited Liability Partnership Firm.

Section 44ADA Limits

In 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. In other words, total gross receipts from profession should not exceed Rs 50 lakh for a financial year.

For example: – Mr. Y, a practicing chartered accountant has gross receipts of Rs. 38 lakhs. He has paid Rs. 250000 towards rent without deducting tax at source. He has unabsorbed depreciation of Rs. 3 lakhs. Since Mr. R is a practicing chartered accountant whose gross receipts are not more than Rs.50 lakhs, he is eligible to opt for Section 44ADA. Accordingly, 50% of his gross receipts or a higher sum shall be deemed to be the profits and gains of such profession. So 38 lakhs * 50% = 19 lakhs. This will be deemed to be his total income.

Opting out of the Scheme under Section 44ADA

Unlike the restriction placed on businesses that have opted for the scheme under Section 44AD, the professionals under Section 44ADA can opt-in and opt-out at any time. They can do this without the five-year restriction.

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Author Bio

Qualification: CA in Practice
Company: DMKH & CO.
Location: MUMBAI, Maharashtra, IN
Member Since: 11 Jul 2017 | Total Posts: 3

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23 responses to “Presumptive Taxation Scheme Section 44AD, 44ADA & 44AE”

  1. R. Dev Anand says:

    Dear anyone,

    Please reply for books maintenance, if books not maintained then how any one can provide Debtor balance, Creditors balance and closing stock, as well as please reply for message for difference in balance sheet when providing information of sundry creditors, sundry debtors and Closing balance

  2. VINEY CHHABRA says:

    Is this clearly mentioned any where that 44ADA doesnot apply to LLP? As per section, it is applicable to Resident Assessee engaed in the profession. Pls. clarify.Thanks a lot.

  3. dinesh kapoor says:

    My question. A Non professional business entity maintains proper books of accounts . AND ITS TURNOVER IS BELOW rS ONE CRORE .
    IS HE MANDATED TO HAVE TAX AUDIT DONE .IN CASE HIS NET PROFIT IS BELOW 8% OR ELSE HAVING LOSSES ?
    ALSO IN CASE A PROFESSIONAL WHOSE TURNOVER IS BELOW RS 50 LACS .AND HE MAINTAINS COMPLETE BOOKS OF ACCOUNTS . DOES HE GOT TO DONE TAX AUDIT IN CASE HIS NET PROFIT IS BELOW 50%OF GROSS RECEIPTS ?

  4. CA MANISH KUMAR SHARMA says:

    Sir/Madam,

    Under Presumptive taxation, I think 8/6 % of the turnover is to be considered as profit/income from business rather than tax.

  5. 9845471318 says:

    Pls correct the writeup if am correct. 44AD doesn’t speak of maintaining books of account. It just says the amt n ways of declaring profit, no need to explain the details of expenses. Section 44A speaks about maintaining books of account, which says if the gross turnover or receipts crosses the limits prescribed then you need to maintain certain records

  6. Ganesan RM says:

    At the time of filing asking closing balance bank cash creditors debtors how given this without maintenance of books must answer this question

  7. Vijay Kalra says:

    Very usefull and beneficial information.
    Thanks

  8. Prasanna Desai says:

    Hello
    Does the total turnover include GST charged ? The question I am asking is due to the application of icds which mandates that turnover includes any taxes payable .

  9. Suresh Bhardwaj says:

    very useful

  10. Shankar Narayan says:

    In case of loss from derivative trading, the income tax software insisting tax audit. Since entire loss can be set off against other business or profession income , asking for tax audit for loss is correct. The software is not asking for tax audit in case of profit. Kindly clarify how to file the return without tax audit

  11. UPDESH says:

    FOR 44AD WHEATHER COMPLETE BALANCE SHEET WILL BE FEEDED OR THE AMOUNT OF DEBTORS/CREDITORS/ CASH IN HAND AND STOCK WILL BE WRITTEN, IF YES THE SYSTEM SHOW DIFFERENCE IN BALANCE SHEET.

  12. Anil Yanagandula says:

    if any person opts out of the scheme he cannot avail
    benefit of presumptive taxation for next 5 years

  13. Pavankumar says:

    Hi

    Person earning commission of Rs 80lks , can he opt for 44Ad

  14. PARDEEP KUMAR says:

    PERSON HAVING AGRICULTURE INCOME, CAN HE/SHE OPT IN FOR PRESUMPTIVE INCOME SCHEME????????

  15. Murli says:

    बहुत ही महत्वपूर्ण जानकारियां इस लेख के माध्यम से आपने दी, ओर आशा ररखते है आप भविष्य में भी आयकर की पेचीदगियों को सरल रूप से व्यक्त करेगें।

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