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:
- Architectural profession
- 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.