According to the Income-tax Act, a person engaged in business or profession is needed to maintain regular books of account and further, he/she has to get his/her accounts audited. The Income-tax Act has created the presumptive taxation scheme under these sections which are 44AD, 44ADA & 44AE to provide relief to small taxpayers.
What is the Meaning of Presumptive Taxation Scheme?
For small taxpayers the IT Act has created presumptive taxation schemes as given below:
- The presumptive taxation scheme of section 44AD.
- The presumptive taxation scheme of section 44ADA.
- The presumptive taxation scheme of section 44AE.
Presumptive Taxation Scheme of Section 44AD
The presumptive taxation scheme of section 44AD is framed to give relief to small taxpayers engaged in any business (except the business of plying, hiring or leasing of goods carriages).
The presumptive taxation scheme of section 44AD can be took by these:
- Resident Individual
- Resident HUF
- Resident Partnership Firm (not LLP Firm)
In other words, the scheme cannot be adopted by a non-resident and by any person other than above mention point.
Which Kind of Businesses not comes under the presumptive taxation scheme of section 44AD?
Section 44AD is not applicable in the following businesses:
- Business of plying, leasing of goods carriages.
- An individual who is carrying on any agency.
- An individual whose income is in the form of commission or brokerage
A person who are having any profession as stipulated under section 44AA(1) cannot adopt under section 44AD.
Can a person whose total turnover or gross receipts for the year exceed INR 2,00,00,000 can adopt the presumptive taxation scheme of section 44AD?
If the total turnover of the business exceeds from INR 2 crore then the scheme of section 44AD cannot be adopted.
How to compute taxable business income in case of a person adopting the presumptive taxation scheme of section 44AD
In case of an individual adopting the provisions of section 44AD, income is calculated on presumptive basis at the rate of 8% of the turnover or gross receipts of the eligible business for the year.
To promote digital transactions and to encourage small unorganized business to accept digital payments, section 44AD is amended w.e.f. the AY 2017-18 to provide that income shall be calculated at the rate of 6% instead of 8%
If turnover/gross receipt is received by an account payee cheque/demand draft or use of electronic clearing system through a bank account or through such other electronic mode as may be stipulated during the previous year or before the due date of filing of return under section 139(1).
Thus, 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 calculated @ 6% or 8%, as the case may be, of the turnover or gross receipt.
The presumptive income calculated as per the prescribed rate is the final income and no further expenses will be allowed or disallowed
Under the normal provisions of the IT Act, taxable business income will be calculated after allowing deduction in respect of expenses which are deductible as per the IT Act (Income-tax Act) and after disallowing expenses which are not deductible according to the IT Act.
In case of a person who is picking for the presumptive taxation scheme of section 44AD, the provisions of allowance/disallowances as provided for under the IT Act will not apply and income calculated @ 6% or 8% will be the final taxable income of the business comes under the presumptive taxation scheme.
While calculating income according to the provisions of section 44AD, separate deduction on account of depreciation is not available.
There is no need to maintain books of account as prescribed u/s 44AA
As Section 44AA deals with provisions relating to maintenance of BOA by a person engaged in business. Hence, a person engaged in business need to maintain BOA of his/her business 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 then the provisions of section 44AA relating to maintenance of BOA will not apply.
Advance tax Payment in respect of income from business covered u/s 44AD
Any individual selecting for the presumptive taxation scheme u/s 44AD is liable to pay full amount of advance tax on or before 15thMarch of the previous year. If he/she fails to pay the advance tax by 15th March of previous year, he/she shall be liable to pay interest according to the section 234C.
What are the Provisions to be applied if a person does not opt for the presumptive taxation scheme of section 44AD?
A person can declare income at lower rate which is at less than 6% or 8%), however, if he/she does so, and his/her income exceeds the max. amount which is not chargeable to tax, then he/she is needed to maintain the BOA as per the provisions of section 44AA and has to get his/her accounts audited according to the section 44AB.
Presumptive Taxation Scheme of Section 44ADA
The presumptive taxation scheme of section 44ADA is designed to endow relief to small taxpayers engaged in specified profession.
Eligible persons who can take benefit of the presumptive taxation scheme of section 44ADA
A person who are having residence in India in following professions are eligible:-
- Legal and Medical
- Engineering or architectural
- Accountancy
- Technical consultancy
- Interior decoration
- Any other profession as notified by CBDT
The Finance Act, 2021 has amended the provisions of section 44ADA to define eligible assesse. With effect from AY 2021-22, the advantage of section 44ADA is eligible only in case of assessee who is an:
a) Individual; and
b) Partnership firm other than a LLP as prescribed under clause (n) of sub-section (1) of section 2 of LLP Act.
What is the way of calculation of taxable income in case of a person adopting the presumptive taxation scheme of section 44ADA?
In case of an individual adopting the provisions of section 44ADA, income will be calculated on presumptive basis, which is 50% of the profession’s total gross receipts.
The presumptive income calculated @ 50% is the final income and no further expenses will be allowed
An individual 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 at the rate of 50%.
While calculating income according to the section 44ADA, separate deduction on account of depreciation is not available.
Payment of advance tax in respect of income from professions covered u/s 44ADA
Any person who are eligible for the presumptive taxation scheme under section 44ADA is liable to pay full amount of advance tax on or before 15th March of the previous year. If he/she fails to pay the advance tax by 15th March of previous year, he/she shall be liable to pay interest as per section 234C.
Maintenance of BOA if an individual opts for presumptive taxation scheme of section 44ADA
In case of a person engaged in a specific profession as prescribed in section 44AA(1) and opts for presumptive taxation scheme of section 44ADA, the provision of section 44AA relating to maintenance of BOA will not apply.
What are the Provisions to be applied if a person does not opt for the presumptive taxation scheme of section 44ADA and declares his/her income from profession at lower rate?
An individual can declare income at lower rate (i.e. less than 50%), however, if he/she does so, and his/her income exceeds the maximum amount which is not chargeable to tax, then he/she is required to maintain the BOA as per the provisions of section 44AA and has to get his/her accounts audited according to the section 44AB.
Presumptive Taxation Scheme of Section 44AE
Eligible taxpayer for the presumptive taxation scheme of section 44AE
The provisions of section 44AE are applicable to the person (which is an individual, HUF, company, etc.).
The presumptive taxation scheme of section 44AE can be adopted by an individual who is involved in the business of plying, hiring or leasing of goods carriages and who does not own more than ten goods vehicles at any time during the year. The scheme of section 44AE is framed to provide relief to small taxpayers engaged in the business of plying, hiring or leasing of goods carriages.
No need to maintain BOA as prescribed under section 44AA
Section 44AA of the IT Act, 1961 has provisions related with maintenance of books of account by a person engaged in business. Thus, a person engaged in business/profession has to maintain BOA of his/her business according to the provisions of section 44AA.
Applicability of the provisions relating to advance tax payment
There is no concession as regards payment of advance tax in case of a person who adopts the presumptive taxation scheme of section 44AE and, hence, he/she will be liable to pay advance tax even if he/she adopts the presumptive taxation scheme of section 44AE.
Provisions to be applied if a person does not opt for the presumptive taxation scheme of section 44AE
A person can declare his/her 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/she does so, then he/she is required to maintain the books of account as per the provisions of section 44AA and has to get his/her accounts audited under section 44AB.