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Presumptive Taxation

Presumptive Taxation Schemes

Last Updated 13th May 2021

  • The Presumptive Tax Scheme is formulated by Income Tax Laws which exempts the small businesses and traders to maintain the proper books of accounts and get them audited.
  • The Presumptive Taxation scheme comprises Section 44AD, 44ADA, and 44AE.
  • All business (except the business of hiring, plying and leasing of goods carriage) with gross receipts or total turnover of up to ₹ 2 Cr is included in Section 44AD and 44ADA.
  • Section 44AE covers the business of plying, hiring and leasing of goods carriage.
  • Form Sugam ITR-4S is applicable for the business filing ITR under presumptive taxation scheme.
INCOME TAX CALCULATOR

Presumptive Tax Rates under Section 44 of Income Tax Act

Presumptive tax allows the calculation of income tax on an estimated income or profit. Maintaining books of accounts and getting audited from C.A is a costly affair for small traders and businessmen. That’s why the Income Tax department has formulated the presumptive tax scheme to help these small traders, businessmen and service providers to pay tax on an estimated income rather than total income.

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 ₹ 2 Cr in a year Annual receipts of not more than ₹ 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 ₹ 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 ₹ 7,500 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.

FAQs

What is meant by presumptive income?

The presumptive income is the estimated income or profit based on which the tax would be calculated for the eligible businesses under the applicable sections of 44AD, 44ADA, and 44AE.

How is presumptive tax calculated?

The applicable slab rate is applied to the presumptive or estimated income to calculate presumptive tax.

How do I file a presumptive tax return?

The presumptive tax return is filed through the Sugam ITR-4S Form, under section 44AD, 44ADA, and 44AE.

Who is eligible for 44ad?

Under Section 44AD (including 44ADA), all businesses except the business of plying, hiring, and leasing goods carriage; with total turnover or gross receipts up to ₹ 2 Cr are eligible.

What is presumptive income from Business & Profession?

The estimated income of business or profession as per the applicable Income Tax provisions under Section 44AD, 44ADA, and 44AE to calculate income tax is the presumptive income from business and profession.

What is Section 44AD of Income Tax Act?

Income Tax Law introduced section 44AD in order to ease the burden of maintaining books of accounts and getting it audited by a C.A for small businesses. The eligible businesses under Section 44AD are not required to make the books of accounts or get them audited formally.

Is 44AD compulsory?

No, Section 44AD is not compulsory. An assessee can opt for computation of income through the regular course, provided the books of accounts are maintained and audited.


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