FAQs on Tax on Presumptive Taxation Scheme

Presumptive Income under Income Tax Act, 1961 is the concept introduced by the Income Tax Department under the Presumptive Taxation Scheme so as to allow the assessee to disclose his income on presumptive basis under the relevant sections and their provisions thereof. Let us understand presumptive income under Income Tax Act, 1961 in detail.

FAQs on Tax on Presumptive Taxation Scheme

What is the meaning of presumptive taxation scheme?

As per sections 44AA of the Income-tax Act, 1961, a person engaged in business is required to maintain regular books of account under certain circumstances. To give relief to small taxpayers from this tedious work, the Income-tax Act has framed the presumptive taxation scheme undersections 44AD, sections 44ADA and sections 44AE.

A person adopting the presumptive taxation scheme can declare income at a prescribed rate and, in turn, is relieved from tedious job of maintenance of books of account.

What is the meaning of presumptive taxation scheme?

As per sections 44AA of the Income-tax Act, 1961, a person engaged in business is required to maintain regular books of account under certain circumstances. To give relief to small taxpayers from this tedious work, the Income-tax Act has framed the presumptive taxation scheme undersections 44AD, sections 44ADA and sections 44AE.

A person adopting the presumptive taxation scheme can declare income at a prescribed rate and, in turn, is relieved from tedious job of maintenance of books of account.

Which businesses are not eligible for presumptive taxation scheme?

The scheme of  section 44AD is designed to give relief to small taxpayers engaged in any business, except the following businesses:

– Business of plying, hiring or leasing goods carriages referred to in sections 44AE.

– A person who is carrying on any agency business.

– A person who is earning income in the nature of commission or brokerage

– Any business whose total turnover or gross receipts exceeds two crore rupees.

Apart from above discussed businesses, a person carrying on profession as referred to in section 44AA(1) is not eligible for presumptive taxation scheme under section 44AD

Can an insurance agent adopt the presumptive taxation scheme of section 44AD?

A person who is earning income in the nature of commission or brokerage cannot adopt the presumptive taxation scheme of section 44AD Insurance agents earn income by way of commission and, hence, they cannot adopt the presumptive taxation scheme of section 44AD.

 

Can a person engaged in a profession as prescribed under section 44AA(1) adopt the presumptive taxation scheme of section 44AD?

 

A person who is engaged in any profession as prescribed under section 44AA(1) cannot adopt the presumptive taxation scheme of section 44AD.

 

However, he can opt for presumptive taxation scheme under section 44ADA and declare 50% of gross receipts of profession as his presumptive income. Presumptive Scheme under section 44ADA is applicable only for resident assessee whose total gross receipts of profession do not exceed fifty lakh rupees.

 

Can a person whose total turnover or gross receipts for the year exceed Rs. 2,00,00,000 adopt the presumptive taxation scheme of section 44AD?

 

The presumptive taxation scheme of section 44AD can be opted by the eligible persons if the total turnover or gross receipts from the business do not exceed the limit prescribed under section 44AB (i.e., Rs. 2,00,00,000). In other words, if the total turnover or gross receipt of the business exceeds Rs. 2,00,00,000 then the scheme of section 44AD cannot be adopted.

 

What is the manner of computation of taxable business income under the normal provisions of the Income-tax Law, i.e., in case of a person not adopting the presumptive taxation scheme of section 44AD?

 

Generally, as per the Income-tax Law, the taxable business income of every person is computed as follows :

 

Particulars	Amount
Turnover or gross receipts from the business	XXXXX
Less : Expenses incurred in relation to earning of the income	(XXXXX)
Taxable Business Income	XXXXX

For the purpose of computing taxable business income in the above manner, the taxpayers have to maintain books of account of the business and income will be computed on the basis of the information revealed in the books of account.

What is the manner of computation of taxable business income in case of a person adopting the presumptive taxation scheme of section 44AD?

In case of a person adopting the provisions of section 44AD, income will be computed on presumptive basis, i.e., @ 8% of the turnover or gross receipts of the eligible business for the year.

 

Income shall be calculated at rate of 6% in respect of total turnover or gross receipts which is received by an account payee cheque or draft or use of electronic clearing system.

 

In other words, in case of a person adopting the provisions of section 44AD, income will not be computed in normal manner as discussed in previous FAQ (i.e., Turnover less Expense) but will be computed @ 8%/6% of the turnover.

 

Income at higher rate, i.e., higher than 8% can be declared if the actual income is higher than 8%.

 

As per the presumptive taxation scheme of section 44AD, income of a taxpayer will be computed @ 8%/6% of the turnover or gross receipt and from such income can the taxpayer claim any further deductions?

 

Under the normal provisions of the Income-tax Law, taxable business income will be computed after allowing deduction in respect of expenses which are deductible as per the Income-tax Act and after disallowing expenses which are not deductible as per the Income-tax Act.

 

In case of a person who is opting for the presumptive taxation scheme of section 44AD, the provisions of allowance/disallowances as provided under the Income-tax Law will not apply and income computed at the presumptive rate of 8%/6% will be the final taxable income of the business covered under the presumptive taxation scheme and no further expenses will be allowed or disallowed.

 

While computing income as per the provisions of section 44AD, separate deduction on account of depreciation is not available, however, the written down value of any asset used in such business shall be calculated as if depreciation as per section 32 is claimed and has been actually allowed.

 

If a person adopts the presumptive taxation scheme of section 44AD, then is he required to maintain books of account as per section 44AA?

 

Section 44AA deals with provisions relating to maintenance of books of account by a person engaged in business/profession. Thus, a person engaged in business/profession has to maintain books of account of his business/profession according to the provisions of section 44AA.

 

In case of a person engaged in a business and opting for the presumptive taxation scheme of section 44AD, the provisions of section 44AA  relating to maintenance of books of account will not apply. In other words, if a person adopts the provisions of section 44AD and declares income @ 8%/6% of the turnover, then he is not required to maintain the books of account as provided under section 44AA in respect of business covered under the presumptive taxation scheme of section 44AD.

 

If a person adopts the presumptive taxation scheme of section 44AD, then is he liable to pay advance tax in respect of income from business covered under section 44AD?

 

Any person opting for the presumptive taxation scheme under section 44AD is liable to pay whole amount of advance tax on or before 15th March of the previous year. If he fails to pay the advance tax by 15th march of previous year, he shall be liable to pay interest as per section 234C.

 

Note: Any amount paid by way of advance tax on or before 31st day of March shall also be treated as advance tax paid during the financial year ending on that day.

 

What provisions will apply if a person who is eligible for the presumptive taxation scheme of section 44AD declares his income at a lower rate (i.e. less than 8%)?

 

A person can declare income at lower rate (i.e., less than 8%/6%), however, if he does so, and his income exceeds the maximum amount which is not chargeable to tax, then he is required to maintain the books of account as per the provisions of section 44AA and has to get his accounts audited as per section 44AB.

 

If a person adopts the presumptive taxation scheme but he opts out from the scheme in any of the subsequent five years, then what are the consequences?

 

If a person opts for presumptive taxation scheme then he is also require to follow the same scheme for next 5 years. If he failed to do so, then presumptive taxation scheme will not be available for him for next 5 years. [For example, an assessee claims to be taxed on presumptive basis under Section 44AD for AY 2017-18. For AY 2018-19 and 2019-20 also he offers income on basis of presumptive taxation scheme. However, for AY 2020-21, he did not opt for presumptive taxation Scheme. In this case, he will not be eligible to claim benefit of presumptive taxation scheme for next five AYs, i.e. from AY 2021-22 to 2025-26.]

 

He is required to keep and maintain books of account and he is also liable for tax audit as per section 44AB from the AY in which he opts out from the presumptive taxation scheme. [If his total income exceeds maximum amount not chargeable to tax]

 

Who is eligible to take advantage of the presumptive taxation scheme of section 44ADA?

 

The presumptive taxation scheme of sections 44ADA can be adopted by a person resident in India, carrying on specified profession whose gross receipts do not exceed fifty lakh rupees in a financial year. Following professions are specified profession:

 

1) Legal

2) Medical
3) Engineering or architectural
4) Accountancy
5) Technical consultancy
6) Interior decoration
7) Any other profession as notified by CBDT

 

What is the manner of computation of taxable income in case of a person adopting the presumptive taxation scheme of section 44ADA?

 

In case of a person adopting the provisions of sections 44ADA, income will be computed on presumptive basis, i.e. @ 50% of the total gross receipts of the profession. However such person can declare income higher than 50%.

In other words, in case of a person adopting the provisions of sections 44ADA, income will not be computed in normal manner but will be computed @50% of the gross receipts.

 

Can a person who adopts the presumptive taxation scheme of section 44ADA claim any further deduction of expenses after declaring profit @ 50% of gross receipts?

 

No, a person who adopts the presumptive taxation scheme is deemed to have claimed all deduction of expenses. Any further claim of deduction is not allowed after declaring profit @ 50%.

 

If a person adopts the presumptive taxation scheme of section 44ADA, then is he liable to pay advance tax in respect of income from profession covered under section 44ADA?

 

Any person opting for the presumptive taxation scheme under sections 44ADA is liable to pay whole amount of advance tax on or before 15th March of the previous year. If he fails to pay the advance tax by 15th march of previous year, he shall be liable to pay interest as per sections 234C.

 

Note: Any amount paid by way of advance tax on or before 31st day of March shall also be treated as advance tax paid during the financial year ending on that day.

 

If a person adopts the presumptive taxation scheme of section 44ADA, then he is required to maintain books of account as per section 44AA?

 

In case of a person engaged in a specified profession as referred in sections 44AA(1) and opts for presumptive taxation scheme of sections 44ADA, the provision of sections 44AA relating to maintenance of books of account will not apply. In other words, if a person opt for the provisions of sections 44ADA and declares income @50% of the gross receipts, then he is not required to maintain the books of account in respect of specified profession.

 

What provision will apply if a person opt for the presumptive taxation scheme of section 44ADA and declares his income from profession at lower rate (i.e. less than 50%)?

 

A person can declare income at lower rate (i.e. less than 50%), however, if he does so, and his income exceeds the maximum amount which is not chargeable to tax, then he is required to maintain the books of account as per the provisions of sections 44AA and has to get his accounts audited as per sections 44AB.

 

For whom the presumptive taxation scheme of section 44AE is designed?

 

The scheme of sections 44AE is available to the person who owns not more than ten goods carriages at any time during the previous year and who is engaged in the business of plying, hiring or leasing such goods carriages.

 

Who is eligible to take advantage of the presumptive taxation scheme of section 44AE and which business is eligible for the presumptive taxation scheme of section 44AE?

 

The provisions of sections 44AE are applicable to every person (i.e., an individual, HUF, firm, company, etc.).

The presumptive taxation scheme of sections 44AE can be adopted by a person who is engaged in the business of plying, hiring or leasing goods carriages and who does not own more than 10 goods vehicles at any time during the year.

Can a person who owns more than 10 goods vehicles adopt the presumptive taxation scheme of section 44AE?

The presumptive taxation scheme of sections 44AE can be adopted by a person who is engaged in the business of plying, hiring or leasing goods carriages and who does not own more than 10 goods vehicles at any time during the year.

 

The important criterion of the scheme is the restriction of owning of not more than 10 goods vehicles at any time during the year. Thus, if a person owns more than 10 goods vehicles at any time during the year, then he cannot take advantage of this scheme.

 

As per the presumptive taxation scheme of section 44AE, income of a taxpayer will be computed at the rate of Rs. 7,500 per goods vehicle per month and in such a case can the taxpayer claim any further

 

Under the normal provisions of the Income-tax Act, taxable business income will be computed after allowing deduction in respect of expenses which are deductible as per the Income-tax Act,1961 and after disallowing expenses which are not deductible as per the Income-tax Act, 1961.

 

In case of a person who is opting for the presumptive taxation scheme of sections 44AE, the provisions of allowance/disallowances as provided under the Income-tax Act,1961 will not apply and income computed at the presumptive rate :

a) Rs. 7,500 per month or part of the month for each goods carriage, during which the goods vehicle is owned by the assessee in the previous year. Part of the month would be considered as full month   (not applicable from A.Y 2019-20)

If the actual income is higher than the presumptive rate, then such higher income can be declared if the taxpayer wants to declare as such.

b) Rs. 7,500 per month or part of the month for each goods carriage (other than heavy goods vehicle) / Rs. 1000 per ton of gross vehicle weight per month or part of the month in case of heavy goods vehicle, during which the goods vehicle is owned by the assessee, in the previous year or actual amount earned whichever is higher. Part of the month would be considered as full month. (Applicable from A.Y 2019-20)

Income computed at the presumptive rate as specified above will be the final income and no further deduction shall be allowed under sections 30 to 38 including depreciation and unabsorbed depreciation.

Heavy goods vehicles means any goods carriage vehicle whose gross vehicle weight exceeds 12000 kilograms.

However, in case of a taxpayer, being a partnership firm, opting for the presumptive taxation scheme, from the income computed at the rate of :

a) Rs. 7,500 per month or part of the month for each goods carriage, during which the goods vehicle is owner by the assessee during the previous year. Part of the month would be considered as full month   (not applicable from A.Y 2019-20)

If the actual income is higher than the presumptive rate, then such higher income can be declared if the taxpayer wants to declare as such.

b) Rs. 7,500 per month or part of the month for each goods carriage (other than heavy goods vehicle) / Rs. 1000 per ton of gross vehicle weight per month or part of the month in case of heavy goods vehicle, during which the goods vehicle is owned by the assessee, in the previous year or actual amount earned whichever is higher. Part of the month would be considered as full month.   (Applicable from A.Y 2019-20) further deduction can be claimed on account of remuneration and interest paid to partners (computed as per the Income-tax Act,1961).

While computing income as per the provisions of sections 44AE, separate deduction on account of depreciation is not available, however, the written down value of any asset used in such business shall be calculated as if depreciation as per sections 32 is claimed and has actually been allowed.

If a person adopts the presumptive taxation scheme of section 44AE, then is he required to maintain books of account as per section 44AA?

 

Section 44AA of the Income-tax Act, 1961 has provisions relating to maintenance of books of account by a person engaged in business/profession. Thus, a person engaged in business/profession has to maintain books of account of his business according to the provisions of  Section 44AA.

 

In case of a person opting for the presumptive taxation scheme of section 44AE, the provisions of  Section 44AA relating to maintenance of books of account will not apply.

 

In other words, if a person adopts the provisions of section 44AE and declares his income as:

 

a) Rs. 7,500 per month or part of the month for each goods carriage, during which the goods vehicle is owned by the taxpayer, in the previous year. Part of the month would be considered as full month. (not applicable from A.Y 2019-20)

 

b) Rs. 7,500 per month or part of the month for each goods carriage (other than heavy goods vehicle) / Rs. 1000 per ton of gross vehicle weight per month or part of the month in case of heavy goods vehicle, during which the goods vehicle is owned by the taxpayer, in the previous year or actual amount earned whichever is higher. Part of the month would be considered as full month.   (Applicable from A.Y 2019-20) then he is not required to maintain the books of accounts under Section 44AA in respect of business covered under the presumptive taxation scheme of section 44AE.

 

If a person adopts the presumptive taxation scheme of section 44AE, then is he liable to pay advance tax in respect of income from business covered under section 44AE?

 

There is no concession as regards payment of advance tax in case of a person who is adopting the presumptive taxation scheme of section 44AE and, hence, he will be liable to pay advance tax even if he adopts the presumptive taxation scheme of section 44AE.

 

What is the meaning of presumptive taxation scheme?

 

In order to facilitate the small taxpayers and provide relief from maintenance of books of account required under section 44AA of the Income-tax Act, 1961 the Government has provided a facility to declare the profits at certain percentage/amount. For small taxpayers, the Income-tax Act, 1961 has framed presumptive taxation schemes as given below:

 

Section 44AD : Computation of income on estimated basis in the case of taxpayers [being a resident individual, resident Hindu undivided family or resident partnership firm (not being a limited liability firm] engaged in certain business subject to certain conditions.

 

Section 44ADA : Computation of professional income on estimated basis for assessee being a resident in India and engaged in a profession referred to in section 44AA(1) subject to certain conditions.

 

Section 44AE : Computation of income on estimated basis in the case of taxpayers (being an Individual, HUF, AOP, BOI, Firm, Company, Co-operative society or any other person may be resident or non-resident) engaged in the business of plying, leasing or hiring goods carriages, subject to certain conditions.

 

Section 44B : Taxation of shipping profits derived by a person being a non-resident in India, subject to certain conditions.Section 44BB : Computation of taxable income of a person being a non-resident (may be an India citizen or a foreign citizen) from activities connected with exploration of mineral oils, subject to certain conditions.

 

Section 44BBA : Computation of income in respect of foreign airlines, subject to certain conditions.

 

Section 44BBB : Computation of profits and gains of foreign companies engaged in the business of civil construction, subject to certain conditions.

 

Which businesses are not eligible for Presumptive taxation Scheme?

 

The scheme of Presumptive taxation is designed to give relief to small taxpayers engaged in any business, except the following businesses:

 

– A person who is carrying on any agency business.

– A person who is earning income in the nature of commission or brokerage
– Any business whose total turnover or gross receipts exceed two crore rupees.

 

What relief is available to an assessee if he computes profit and gains under section 44AE?

 

–   An assessee who does not wish to compute profits and gains as per section 44AE i.e.,

 

a) Rs. 7,500 per month or part of the month for each goods carriage during which the goods vehicle is owned by the taxpayer in the previous year. Part of the month would be considered as full month. (not applicable from A.Y 2019-20)

 

If the actual income is higher than the presumptive rate, then such higher income can be declared if the taxpayer wants to declare as such.

 

b) Rs. 7,500 per month or part of the month for each goods carriage (other than heavy goods vehicle) / Rs. 1000 per ton of gross vehicle weight per month or part of the month in case of heavy goods vehicle, during which the goods vehicle is owned by the taxpayer, in the previous year or actual amount earned whichever is higher . Part of the month would be considered as full month.   (applicable from A.Y 2019-20)

 

then profits and gains from such business shall be computed as per the normal provisions of the Income Tax Act.

 

–   Further, the assessee shall also be required to keep and maintain such books of account and other documents as are required under section 44AA and get them audited and furnish a report of such audit as required under section 44AB.

–   In other words, an assessee, who adopts section 44AE, is not required to maintain books of account under section 44AA or get them audited under section 44AB .

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