Guide on Presumptive Income Tax Scheme

This document covers

1. What is Presumptive Income Tax Scheme?
2. Business Income
3. Professional Income
4. Select Businesses

1. What is Presumptive Income Tax Scheme?

To give relief to small taxpayers from the tedious job of maintenance of books of account and from getting the accounts audited, the Income-tax Act has framed three presumptive taxation schemes under sections 44AD, 44ADA and 44AE.

Suits small taxpayers like freelancers, professionals, doctors, lawyers, advocates, accountants, engineers, contractors, MSME businesses

For small taxpayers the Income-tax Act has framed presumptive taxation schemes and are covered in this document:

1. Business Income - Presumptive Income Tax under Section 44AD
2. Professional Income - Presumptive Income Tax under Section 44ADA
3. Select Businesses - Presumptive Income Tax under Section 44AE

2. Business Income - Presumptive Income Tax under Section 44AD

2A) Who can choose presumptive taxation scheme of 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)

It means, 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).

And this scheme cannot be adopted by a person who has made any claim towards deductions under section 10A/10AA/10B/10BA or under sections 80HH to 80RRB in the relevant year.

2B) Persons / Business not covered under this section 44AD

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 of goods carriages referred to in section 44AE.
• A person who is carrying on any agency business.
• A person who is earning income in the nature of commission or brokerage
• A person whose total turnover or gross receipts for the year exceed Rs. 2,00,00,000.

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

2C) Computation of taxable business income under the presumptive taxation scheme of section 44AD

In case of a person adopting the provisions of section 44AD, income is computed on presumptive basis at the rate of 6% of the turnover if payments accepted digitally or 8% of the turnover if payments accepted in cash mode. However, a person may voluntarily disclose his business income at more than 8% or 6%, of turnover.

NOTE : If 44AD/44ADA is opted by partnership Firm, Salary and Interest paid to Partners cannot be deducted with respect to Section 40(b)

2D) Payment of advance tax under section 44AD

Any person choosing 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.

3. Professional Income - Presumptive Income Tax under Section 44ADA

3A) Who can choose presumptive taxation scheme of Section 44ADA

The presumptive taxation scheme of section 44ADA is designed to give relief to small taxpayers engaged in specified professions.

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 ( Profession of Information Technology *, Company Secretary, Film Artist, Authorized Representative )

3B) Persons / Business not covered under this section 44ADA

Certain professionals whose total gross receipts from profession exceed Rs. 50,00,000 in a financial year are not eligible to choose this section.

3C) Computation of taxable business income under the presumptive taxation scheme of section 44ADA

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

3D) Payment of advance tax under section 44ADA

Any person choosing for the presumptive taxation scheme under section 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 section 234C.

4. Select Businesses - Presumptive Income Tax under Section 44AE

4A) Who can choose presumptive taxation scheme of Section 44AE

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

NOTE : If 44AE is opted by partnership Firm, Salary and Interest paid to Partners can be deducted with respect to Section 40(b)

4B) Persons / Business not covered under this section 44AE

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

4C) Computation of taxable business income under the presumptive taxation scheme of section 44AE

In case of a person who is willing to choose 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 : Heavy Goods Vehicle means any goods carriage whose gross vehicle weight exceeds 12,000 Kilograms

4D) Payment of advance tax under section 44AE

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 will be liable to pay advance tax even if he adopts the presumptive taxation scheme of section 44AE.