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Presumptive Tax - section 44AD, 44ADA and 44AE for businesses, professionals, transporters

Presumptive Tax Rates under Section 44 of Income Tax Act

Small Businessmen Professionals Transporters
Applicable Income Tax Section Section 44AD Section 44ADA Section 44AE
Eligible business Entities in any business excluding :
  • Business of plying, hiring or leasing goods carriages
  • Agency business
  • With income as commission or brokerage
Professionals offering:
  • Legal services
  • Technical consultancy
  • Interior decoration
  • Engineering and architectural
  • Medical
  • Any other profession specified by CBDT
Entities in the business of:
  • Hiring, plying or leasing of goods carriages
Eligibility criteria, Maximum Turnover Limit Turnover up to Rs. 2 crore in a year Annual receipts of not more than Rs. 50 lakh in a year Owning not more than 10 goods vehicles during the year
Presumptive computation of taxable income 8% of total receipts provided that non cash and electronic receipts shall be charged at 6% of gross turnover during the year. A higher income can be declared 50% of gross receipts. A higher income of more than 50% can be declared Rs. 7,500 per vehicle per month or part thereof based on the duration for which the vehicle was owned by the person during the year
Tax Rate At marginal tax rate slabs At marginal tax rate slabs At marginal tax rate slabs
Deductions or allowances No further deductions and exemptions allowed No further deductions and allowances allowed. No further deductions and allowances allowed.
Exception: Partnership firm can claim deduction for and interest to the partners from the income computed at Rs 7500 per vehicle per month
Advance tax liability To be deposited in one installment on or before 15th March of previous year To be deposited in one installment on or before 15th March of previous year To be deposited in one installment on or before 15th March of previous year

Presumptive Tax as per Income Tax Act:

Under Section 44 of Income Tax Act, any person engaged in business or profession is required to maintain book of accounts for every financial year and get them audited by certified auditors. The procedure of maintaining book of accounts and getting them audited gets cumbersome for small tax payers. Income Tax Department has formulated a scheme named as “Presumptive Tax Scheme” under section 44AD, 44ADA and 44AE of Income Tax Act which exempts the small tax payers from maintaining annual book of accounts.
Under presumptive taxation scheme, profits from business or profession are presumed/ estimated a certain percent of the annual turnover of the entity and taxed accordingly. The manner of computation of income under presumptive taxation scheme is different under sections 44AD, 44ADA and section 44AE of Income tax act.

Benefit of opting under Presumptive Taxation Scheme

  • Exemption from maintaining books of accounts
  • Simplifies the process Income Tax compliance
  • No need to hire auditors to audit book of accounts

Presumptive tax is applicable under the three sections of Income Tax Act:

  • Presumptive taxation scheme of section 44AD is applicable in case of business
  • Presumptive taxation scheme of section 44ADA is applicable in case of profession
  • Presumptive taxation scheme of section 44AE is applicable in case of business of plying, hiring or leasing of goods carriage.

Entities that are eligible for Presumptive Tax Scheme

  • Resident individual
  • Resident HUF
  • Resident partnership firm excluding the partnership firm with limited liability

Entities that are not eligible for Presumptive Tax Scheme

  • Non-resident individuals
  • Limited liability partnership firm
  • Companies

Consequences if a person opts out of presumptive taxation scheme under section 44AD

When a person opts for the presumptive taxation scheme under section 44AD, he is required to follow the same scheme for next five years. In case he fails to do so, then he will not be able to avail the presumptive taxation scheme for next five years starting from the assessment year in which he chose to opt out of the scheme.

Deductions under presumptive taxation scheme

A person adopting presumptive taxation scheme is deemed to have claimed all the deduction of expense and hence, no further deductions on account of expenses (including depreciation) is allowed. However, the written down value of any asset used will be calculated as if the depreciation has been claimed under section 32 of Income Tax Act and has been actually allowed.

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