Presumptive taxation - A simplified scheme for small businesses and professions

What is Presumptive Taxation Scheme?

To reduce the burden of various compliances, Govt. has introduced a scheme of Presumptive Taxation under section 44AD, 44ADA and 44AE of the Income Tax Act 1961. Under this scheme income of the assesses is calculated on presumptive basis rather than on actual basis. A person adopting the presumptive taxation scheme can declare income at prescribed rates. This scheme is most likely to benefit small traders, businessmen and professionals and relieve them from complying various requirements.

Advantages of Presumptive Taxation Scheme:

• No Need to maintain Books of Accounts
• Audit is not required
• Deduction under Chapter VI A is available. These include all deductions under section 80C, 80D, 80G and others.
  • Life insurance premium
  • Contribution to PF and PPF
  • Repayment of housing loan
  • Specified Mutual Fund investments
  • Contribution to NPS
• Deduction of Housing loan interest is available
• Simple Income tax return from filing

Eligibility to opt Presumptive Taxation Scheme under 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 (Excluding Limited Liability Partnership Firm)

Manner of Computation of Taxable 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.

It must be noted that in order to promote digital transactions and to encourage small businesses to accept digital payments, the Govt. has amended section 44AD with effect from Assessment Year 2017-18. Now income can be computed at the rate of 6% instead of 8% only 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 during the previous year or before the due date of filing of return under section 139(1).

However if a person is opting for the presumptive taxation scheme under section 44AD, the provisions of allowance/disallowances as provided under the Income-tax Act will not be allowed and income computed at the presumptive rate of 6% or 8% will be the final.

Eligibility to opt Presumptive Taxation Scheme under section  44ADA?

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

Manner of Computation of Taxable Income under Section 44ADA:

If a person adopting the Presumptive Taxation Scheme under Section 44ADA, income will be computed on presumptive basis, i.e. @ 50% of the total gross receipts of the profession. Further A person who opts the presumptive taxation scheme is deemed to have claimed all deductions. Any further claim of deduction is not allowed after declaring profit @ 50%.

Eligibility to opt Presumptive Taxation Scheme under section 44AE?

The presumptive taxation scheme of section 44AE can be opt by 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.

Manner of Computation of Taxable Income under Section 44AE:

In this case income will be computed on an estimated basis. Income will be computed @Rs. 7,500 per month or part thereof during which the goods vehicle is owned by the taxpayer during the year. Part of the month would be considered as full month.