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Fincash » Tax Planning » Presumptive Taxation Scheme

Presumptive Taxation Scheme

Updated on April 8, 2024 , 5956 views

The Presumptive taxation scheme is to help ensure you maintain your accounts well and file your income tax on time. According to the Income Tax Act, 1961, anyone engaged in business activities has to maintain an account book. Maintaining this is quite a difficult task, especially for small taxpayers.

Presumptive Taxation Scheme

In order to provide relief on this front, the government incorporated Section 44AD, Section 44ADA and Section 44AE.

Let’s take a brief look at them.

What is Section 44AD?

Section 44AD of the Income Tax Act is for small taxpayers who own a business but have not claimed any Deduction u/s 10/A 10/AA 10/B 10/BA or 80HH to 80RRB for a year. These small taxpayers are individuals, hindu undivided family (HUF) and partnership firms. The relief under Section 44ADA is not available to the following taxpayers:

  • Business involved in plying, hiring or leasing of goods carriages as mentioned in Section 44AE.

  • Individual with an agency business

  • Individual earning income through commission or brokerage

  • Individual engaged in a profession as mentioned under Section 44AA (1)

Important Points Under Section 44AD

  • The taxation scheme of section 44AD can be carried out if your total turnover or gross Receipt from the business does not exceed Rs. 2 crores

  • If you are adopting the provisions of the scheme, your income will be computed at 8% of the turnover or gross receipt for the eligible business year. Note that the income computed under this scheme will be the final income of the business covered under presumptive taxation scheme and no other expenses will be allowed.

  • Income higher than 8% can be declared if actual income is higher than 8%

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  • You can also choose to declare income at a lower rate i.e. less than 8%. If you do so, your income will exceed the exemption limit, and you will be required to maintain the account book under Section 44AA and get the accounts edited under Section 44AB.

  • In Budget 2016, it was announced that if you go for this scheme, you will be required to follow it for the next 5 years. If you do not do so, the presumptive taxation scheme will be unavailable to you for the next 5 years. In such a case, you will have to maintain books of account and get them audited.

What is Section 44ADA?

Section 44ADA is a provision in order to calculate the profits and gains of small professionals. This was introduced to extend the scheme of simplified presumptive taxation to professionals. Previously, this tax scheme was applicable to small businesses.

The scheme helps reduce the compliance burden on small professions and eases doing business. Profits Under this section, professionals with total gross receipts less than Rs. 50 lakhs a year are eligible. They include the following:

1. Individual Professionals

Individual professionals above 18 years of age are eligible under this section. These include the following:

  • Interior Decorators

  • Individuals in technical consulting

  • Engineers

  • Accounting Professionals

  • Legal Professionals

  • Medical Professionals

  • Professionals in Architecture

  • Movie Artists (editor, actor, director, music producer, music director, dance director, singer, lyricist, story writer, dialogue writer, costumer designers, cameraman)

  • Other notified professionals

2. Hindu Undivided Families (HUFs)

Members of the Hindu Undivided Families are eligible.

3. Partnership Firms

Partnership firms are eligible. However, note that limited liability partnerships are not eligible.

Important Points About Section 44ADA

  • After the profits have been taxed under Section 44ADA at 50% of the gross receipts, the other balance of 50% is allowed towards all business expenses of the beneficiary. The business expenses include books, stationery, Depreciation on assets (like a laptop, vehicle, printer), daily expenses, telephone charges, the expenses incurred on taking services from other professionals and more.

  • The Written Down Value (WDV) of assets for the purpose of tax will be calculated as the depreciation that is allowed each year. Note that WDV is the value of the asset for the purpose of tax in case the asset is later sold by the beneficiary.0% of the gross receipts under this tax scheme.

What is Section 44AE?

Section 44AE of the Income Tax Act is a provision for relief to everyone involved in the business of plying, hiring or leasing of goods and carriages. These small taxpayers should not be owning more than 10 goods carriage vehicle at any time during a financial year in order to claim this relief.

Important Points Under Section 44AE

  • Under this section, the term ‘person’ includes everyone i.e. an individual, HUF, company, etc.

  • If you opt for this section, your income will be computed at Rs. 7500 per vehicle during a financial year. Even a part of a month will be considered as a full month under this section.

  • If your income is higher than the presumptive rate, the higher income will be declared as per the wish of the taxpayer

  • If you declare your income at a lower rate i.e. less than Rs. 7500, and your income is more than the basic exemption limit, you will be required to maintain accounts book under Section 44AA and get them audited under Section 44AB.

  • The provisions regarding deductions, depreciation, written down value of asset, Advance Tax, maintenance books of account are same as above.

Conclusion

The presumptive taxation scheme is a boon to small taxpayers. Make complete use of the scheme and enjoy the benefits.

Disclaimer:
All efforts have been made to ensure the information provided here is accurate. However, no guarantees are made regarding correctness of data. Please verify with scheme information document before making any investment.
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