Are you a small business that is constantly looking to strengthen your routes in the market but stuck up with maintaining a balance sheet? Or a professional freelancer who is continuously caught up with different projects and has no time to main financial records? If yes, then we think we can relieve your burden regarding tax saving as you no longer need to worry when the tax filing season approaches.
What Is A Presumptive Taxation Scheme (PTS) Scheme?
The Presumptive Taxation Scheme, according to sections 44AA of the Income-tax Act, 1961, was introduced to relieve the small business owners and income professionals from maintaining a book of accounts. They will now be enabled to declare their total taxable income at a predefined rate. This scheme has been prescribed under three sections as specified below:
Section 44AD: Under this section, the presumptive scheme is basically available for small businesses or firms who fulfill the criteria mentioned below:
- Any individual who is a resident of India
- Hindu Undivided Families (HUFs) who are residents of India
- A partnership firm that is resident to India
- Any individual who has not claimed deductions under section 10A, 10AA, 10B, 10BA or deductions under any provisions of Chapter VIA (sections 80HH to 80RRB) in the relevant year.
Once you are approved of the eligibility, your business should also be able to comply with the conditions specified below in accordance with the Income Tax Act.
- Your turnover must be less than Rs. 2 crores.
- Any businesses except the ones referred to under section 44AE.
Section 44ADA: Section 44ADA is specially designed for small professionals engaged in any of the professions listed below:
- Legal
- Medical
- Engineering or architectural
- Accountancy
- Technical consultancy
- Interior decoration
- Any other profession as notified by CBDT
Any professional whose total gross receipts are not more than Rs.50 lakhs in the previous year; the income will be computed @ 50% of the total gross receipts of the profession.
Section 44AE: Under this section, all the small taxpayers involved in any kind of business, such as plying, renting, or leasing of goods and carriages, will be able to avail of the benefits. These taxpayers can be –
- Any individual
- A HUF (Hindu Undivided Family)
- A Company
- A Firm
According to this to section, their income would be calculated as specified below:
- An individual’s taxable income will be computed on an estimation basis.
- The taxable income will be calculated at an estimation of Rs 7,500 on a monthly basis or partially on this amount, depending on the duration the goods vehicle is under the ownership of the individual during the year.
In addition to these sections, when you opt for the presumptive taxation scheme, you must –
- File tax under this scheme for at least 5 years continually.
- If you choose to opt-out and file your taxes according to regular ITR-3 before completion of these 5 years, you will be discarded from filing under a presumptive scheme for the next 5 years.
Let’s quickly have a look at how will it be computed for a salaried individual under section 44ADA:
Example: Pavan is a full-time salaried person & a part-time freelancer, so let’s see how he can file tax under PTS scheme.
Pavan’s Income – Rs. 35,000/Month = Rs. 4,20,000
House Rent Allowance – Rs. 90,000
Standard Deduction – 50,000
Taxable Income – 2,80,000
Income from Other Sources:
Gross Income from freelancing projects – Rs. 6,00,000
Computation:
According to section 44ADA, Pavan’s total taxable income will be calculated as follows:
50% of Gross is Taxable Income – 50% of Rs. 6,00,000 = Rs. 3,00,000
Total Taxable Income = Rs. 2,80,000 + Rs. 3,00,000 = Rs. 5,80,000
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