Things that you should know about Presumptive Tax Scheme

Things that you should know about Presumptive Tax Scheme

Question 1 : What is the Meaning of Presumptive Tax 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 under sections 44AD, sections 44ADA, sections 44AE etc.

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.

Various Presumptive Schemes Framed by Government are as follows:

Section 44AD	The presumptive taxation scheme of section 44AD can be adopted by following persons : 1) Resident Individual 2) Resident Hindu Undivided Family 3) Resident Partnership Firm (not Limited Liability Partnership Firm) In other words, the scheme cannot be adopted by a non-resident and by any person other than an individual, a HUF or a partnership firm (not Limited Liability Partnership Firm).
Section 44ADA	A person resident in India engaged in following professions can take advantage of presumptive taxation scheme of section 44ADA:- 1) Legal 2) Medical 3) Engineering or architectural 4) Accountancy 5) Technical consultancy 6) Interior decoration 7) Any other profession as notified by CBDT
Section 44AE	The provisions of section 44AE are applicable to every person (i.e., an individual, HUF, firm, company, etc.).
Section 44BB	Non-resident assessee engaged in exploration of mineral oil is coveredunder this section
Section 44BB	Foreign Company engaged in civil construction is covered under this section

Question 2 : Can a insurance agent cannot 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.

Question 3: Name the Businesses who cannot opt for presumptive taxation scheme of section 44AD

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

1. Business of plying, hiring or leasing of goods carriages referred to in section 44AE.
2. A person who is carrying on any agency business.
3. A person who is earning income in the nature of commission or brokerage

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

Question 4 : Is there a turnover limit for adopting 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 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.

Question 5 : How can I compute my Income under section 44AD?

In case of a person adopting the provisions of section 44AD, income is computed on presumptive basis at the rate of 8% of the turnover or gross receipts of the eligible business for the year.

In order to promote digital transactions and to encourage small unorganized business to accept digital payments, section 44AD is amended with effect from the assessment year 2017-18 to provide that income shall be computed at the rate of 6% instead of 8% if turnover/gross receipt is received by an account payee cheque or an account payee bank draft or use of electronic clearing system through a bank account or through such other electronic mode as may be prescribed during the previous year or before the due date of filing of return under section 139(1).

Hence, in case of a person adopting the provisions of section 44AD, income will not be computed in normal manner as discussed earlier (i.e., Turnover less Expenses) but will be computed @ 6% or 8%, as the case may be, of the turnover or gross receipt.

However, a person may voluntarily disclose his business income at more than 8% or 6%, as the case may be, of turnover or gross receipt.

Question 6 : What are the Consequences if a person opts out from the presumptive taxation scheme of section 44AD?

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 and 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.]

Further, 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]

You may also refer : Tax Audit under Section 44AB for AY 19-20

Question 7 : Can I get Deduction of Expenses if I am opting for the presumptive taxation scheme?

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 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, the provisions of allowance/disallowances as provided for under the Income tax Act will not apply and income will be computed at the presumptive rates.

Question 8 : What are various Rates of Computing Income in Presumptive Taxation Scheme of Income Tax?

Applicable Income Tax Section	Section 44AD	Section 44ADA	Section 44AE
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

Question 9 : Do I need to Maintain Books of Accounts if I am opting for Presumptive Taxation Scheme of Income Tax?

In case of a person opting for Presumptive Taxation Scheme of Income Tax under section 44AD, 44ADA, or 44AE the provision of section 44AA relating to maintenance of books of account will not apply.

Question 10 : What are the consequences if a person opts out from the presumptive taxation scheme of section 44AD?

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 and 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.]

Further, 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]

Question 11 : What if a person does not 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 section 44AA and has to get his accounts audited as per section 44AB.

Question 12 : I have opted for Presumptive Taxation Scheme. Am I liable to Pay Advance Tax?

Any person opting for the presumptive taxation scheme 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.

You May Also Refer : FAQs on Interest under section 234A, 234B & 234C

Question 13 : Mr A owns 11 goods vehicles. Can he adopt the presumptive taxation scheme of section 44AE?

The presumptive taxation scheme of section 44AE can be adopted by a person who is engaged in the business of plying, hiring or leasing of 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 on 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.

The manner of computation of taxable business income in case of a person adopting the presumptive taxation scheme of section 44AE

In case of a person who is willing to opt for the presumptive taxation scheme of section 44AE, income will be computed on an estimated basis.

For Heavy Goods Vehicle, income will be computed at the rate of Rs. 1,000 per ton of gross vehicle weight for every month or part of a month during which the heavy goods vehicle is owned by taxpayer. In case of vehicles other than heavy goods vehicle, income will be computed at the rate of 7,500 for every month or part of a month during which the goods carriage is owned by taxpayer. Part of the month would be considered as full month.

Note 1 : If the actual income is higher than the presumptive rate, i.e., higher than Rs. 1,000/Rs. 7,500, then such higher income can be declared.

Note 2 : “Heavy Goods Vehicle” means any goods carriage having gross vehicle weight exceeding 12,000 kilograms

Question 14 : What are provisions to be applied if a person does not opt for the presumptive taxation scheme of section 44AE and declares income at a lower rate, i.e., at less than Rs. 1,000 per ton or Rs. 7,500 per goods vehicle per month?

A person can declare his income at lower rate (i.e., at less than Rs. 1,000 per ton or Rs. 7,500 per goods vehicle per month). However, if he does so, then he is required to maintain the books of account as per the provisions of section 44AA and has to get his accounts audited under section 44AB

Applicable Income Tax Section	Section 44AD	Section 44ADA	Section 44AE
Eligible business	Entities in any business excluding :   Business of plying, hiring or leasing goods carriagesAgency businessWith 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

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