What is the presumptive taxation scheme?

Last Updated at: December 28, 2019
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What is the presumptive taxation scheme

The tax assessment plan was presented by the Income Tax Act as a method through which the citizens who perform errands, for example, the reviewing of records just as keeping up record books would get some type of alleviation. This implies any individual hoping to benefit from this plan will almost certainly announce his or her absolute taxable salary at a predefined rate while acquiring help from the weighty assignment of account protection and audit. For this reason, the Income Tax Act has launched two sorts of possible tax assessment schemes:

  • The presumptive taxation scheme under Section 44AD
  • The presumptive taxation scheme under Section 44AE

The complete detail about the presumptive taxation scheme was explained under Section 44AD, Section 44ADA and Section 44AE.

In this article, you will specifically learn about presumptive taxation Section 44AD.

Presumptive Taxation Scheme under Section 44AD:

As per the Income-tax Act, the presumptive taxation scheme was introduced to give relief to small taxpayers from maintaining books of account and getting their accounts audited by the Income-tax department. It was launched by the Income Tax Act to facilitate the taxation rate on small taxpayers. The taxpayers are engaged with completing any sort of business. However, there is an exception for those organisations referenced under segment 44AE. Section 44AD is applicable for a person engaged in business or profession.

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Eligibility for the Presumptive Taxation Scheme under Section 44AD:

The below-mentioned persons are eligible to benefit from the presumptive taxation scheme under section 44AD.

  • Any person who is an inhabitant of India
  • Hindu Undivided Families (HUFs) who are inhabitants of India
  • An Indian partnership corporation

Indeed a person who opts for presumptive taxation scheme must continue under the scheme for a continuous period of 5 years. If you fail to continue at any year, then you will be disallowed for the next 5 years.
Note: This is introduced to discourage taxpayers from misusing this scheme.

Any person or entity referenced above can receive this scheme given that they have claimed tax derivations for the significant appraisal year under the accompanying areas

  • 10A
  • 10AA
  • 10B
  • 10BA
  • 80HH
  • 80RRB

The accompanying persons are not entitled to benefit the presumptive taxation scheme under section 44AD

A corporation that does not come under the Presumptive Taxation Scheme under Section 44AD:

While the presumptive taxation scheme under Section 44AD is formed to alleviate small taxpayers who complete business, there are a couple of special cases concerning the kind of business the citizen might be occupied in that cannot benefit the arrangements drafted out under section 44AD. These are:

  • Any business under section 44AE that includes the leasing, contract or handling of products carriages
  • Any business related to agencies
  • Individuals who get commission or income from brokerage
  • Any person who is associated with any line of work referenced under section 44AA(1)
  • Insurance agents, as any pay they get, is through commission
  • Any person who gains a net salary of more than Rs 1 lakh per annum. But, a special case to this standard emerges if the gross pay is not more than the audit limit of Rs 1 lakh as mentioned in section 44AB

Estimation of taxable income for individuals availing of the Presumptive Taxation Scheme of Section 44AD:

Should any individual hope to profit the arrangements drafted under section 44AD, his or her assessable salary will be determined dependent on assumption. This implies the person’s presumptive salary will be determined at 8 per cent of his or her yearly turnover or gross pay. This pay determined at the pace of 8 per cent will be viewed as the last outright salary of the individual and no extra consumption will be considered.

Estimation of taxable business revenue based on the Presumptive Taxation Scheme under Section 44AD in case of Partnership Firm:

If the citizen is referred to as a partnership business, at that point the accompanying conditions apply when receiving the possible tax assessment scheme under section 44AD

Following the assessable salary determined at 8 per cent as referenced already, extra findings will be permitted to be claimed on the accompanying.

  • Compensation paid to partners of the company
  • Interest received by the partners of the company
  • Deductions cannot be claimed in case of devaluation, although the estimation of benefits possessed by the business will be determined based on supposed depreciation under section 32

Non-requirements of the taxpayer in the Presumptive Taxation Scheme of Section 44AD:

For those citizens who have benefited the presumptive taxation scheme of section 44AD, the accompanying duties are not required to be completed:

For people continuing any business or occupation and who have benefited the presumptive taxation scheme of section 44AD, the protection of account books would not be relevant. Should the person being referred to make an assertion of his or her salary determined at 8% of the total annual turnover. At that point, no account maintenance is required according to the arrangements illustrated under the presumptive taxation scheme. Individuals benefiting the presumptive taxation scheme are not required to pay tax on any regulatory obligation ahead of time concerning the pay they get from the business they are occupied with, as referenced in the provisions of section 44AD. Thus, the presumptive taxation scheme comes as a great relief for small taxpayers under Section 44AD.

What kind of businesses are not eligible for presumptive taxation scheme?

As per Section 44AD of the Income-tax Act, the following types of business are not eligible for presumptive taxation:

  • Any business referred under Section 44AE (Plying, hiring or leasing goods carriages)
  • Any agency business
  • A person who is earning through commission or brokerage.
  • Any person or business whose total turnover or gross receipts exceeds Rs. 2 Crore.

What are the professions not eligible for presumptive taxation Section 44AD?

A person who is carrying any of the following profession under Section 44AA(1) is also not eligible for presumptive taxation under Section 44AD:

  1. Engineering
  2. Legal
  3. Medical
  4. Architecture
  5. Accountant
  6. Technical consultant
  7. Interior decoration or any other profession

How to calculate business income for a person opting for the presumptive taxation under section 44AD?

Generally, the income tax of a person carrying business is calculated under a normal provision under the income-tax act and he needs to maintain books of accounts and get his accounts audited.

But, in case a person adopting the presumptive taxation scheme u/s 44AD, then he needs to calculate his income tax as follows:

  1. The income is calculated at the rate of 8% of the turnover or gross receipts of the business.
  2. The income is calculated at the rate of 6% of the turnover or gross receipts if your business income is received by cheque, bank draft or electronic transaction through a bank account or any other digital mode.

This was introduced to encourage small businesses to take up the digital transaction. Moreover, section 44AD was amended. And it came into effect from the assessment year 2017-18. A person opting for presumptive taxation under Section 44AD is liable to pay the whole amount on or before the 15th of March of the previous year.

Can a taxpayer claim any further deduction under Section 44AD?

No, a separate deduction is not allowed under this scheme. 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 allowed.

Is it required to maintain books of account under section 44AD?

If a person opts for a presumptive taxation scheme under Section 44AD and declares income at the rate of 6% or 8% of the turnover or gross receipts, then he is not required to maintain books of accounts as given under Section 44AA.

 

What is the presumptive taxation scheme?

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The tax assessment plan was presented by the Income Tax Act as a method through which the citizens who perform errands, for example, the reviewing of records just as keeping up record books would get some type of alleviation. This implies any individual hoping to benefit from this plan will almost certainly announce his or her absolute taxable salary at a predefined rate while acquiring help from the weighty assignment of account protection and audit. For this reason, the Income Tax Act has launched two sorts of possible tax assessment schemes:

  • The presumptive taxation scheme under Section 44AD
  • The presumptive taxation scheme under Section 44AE

The complete detail about the presumptive taxation scheme was explained under Section 44AD, Section 44ADA and Section 44AE.

In this article, you will specifically learn about presumptive taxation Section 44AD.

Presumptive Taxation Scheme under Section 44AD:

As per the Income-tax Act, the presumptive taxation scheme was introduced to give relief to small taxpayers from maintaining books of account and getting their accounts audited by the Income-tax department. It was launched by the Income Tax Act to facilitate the taxation rate on small taxpayers. The taxpayers are engaged with completing any sort of business. However, there is an exception for those organisations referenced under segment 44AE. Section 44AD is applicable for a person engaged in business or profession.

Get Online GST Registration

Eligibility for the Presumptive Taxation Scheme under Section 44AD:

The below-mentioned persons are eligible to benefit from the presumptive taxation scheme under section 44AD.

  • Any person who is an inhabitant of India
  • Hindu Undivided Families (HUFs) who are inhabitants of India
  • An Indian partnership corporation

Indeed a person who opts for presumptive taxation scheme must continue under the scheme for a continuous period of 5 years. If you fail to continue at any year, then you will be disallowed for the next 5 years.
Note: This is introduced to discourage taxpayers from misusing this scheme.

Any person or entity referenced above can receive this scheme given that they have claimed tax derivations for the significant appraisal year under the accompanying areas

  • 10A
  • 10AA
  • 10B
  • 10BA
  • 80HH
  • 80RRB

The accompanying persons are not entitled to benefit the presumptive taxation scheme under section 44AD

A corporation that does not come under the Presumptive Taxation Scheme under Section 44AD:

While the presumptive taxation scheme under Section 44AD is formed to alleviate small taxpayers who complete business, there are a couple of special cases concerning the kind of business the citizen might be occupied in that cannot benefit the arrangements drafted out under section 44AD. These are:

  • Any business under section 44AE that includes the leasing, contract or handling of products carriages
  • Any business related to agencies
  • Individuals who get commission or income from brokerage
  • Any person who is associated with any line of work referenced under section 44AA(1)
  • Insurance agents, as any pay they get, is through commission
  • Any person who gains a net salary of more than Rs 1 lakh per annum. But, a special case to this standard emerges if the gross pay is not more than the audit limit of Rs 1 lakh as mentioned in section 44AB

Estimation of taxable income for individuals availing of the Presumptive Taxation Scheme of Section 44AD:

Should any individual hope to profit the arrangements drafted under section 44AD, his or her assessable salary will be determined dependent on assumption. This implies the person’s presumptive salary will be determined at 8 per cent of his or her yearly turnover or gross pay. This pay determined at the pace of 8 per cent will be viewed as the last outright salary of the individual and no extra consumption will be considered.

Estimation of taxable business revenue based on the Presumptive Taxation Scheme under Section 44AD in case of Partnership Firm:

If the citizen is referred to as a partnership business, at that point the accompanying conditions apply when receiving the possible tax assessment scheme under section 44AD

Following the assessable salary determined at 8 per cent as referenced already, extra findings will be permitted to be claimed on the accompanying.

  • Compensation paid to partners of the company
  • Interest received by the partners of the company
  • Deductions cannot be claimed in case of devaluation, although the estimation of benefits possessed by the business will be determined based on supposed depreciation under section 32

Non-requirements of the taxpayer in the Presumptive Taxation Scheme of Section 44AD:

For those citizens who have benefited the presumptive taxation scheme of section 44AD, the accompanying duties are not required to be completed:

For people continuing any business or occupation and who have benefited the presumptive taxation scheme of section 44AD, the protection of account books would not be relevant. Should the person being referred to make an assertion of his or her salary determined at 8% of the total annual turnover. At that point, no account maintenance is required according to the arrangements illustrated under the presumptive taxation scheme. Individuals benefiting the presumptive taxation scheme are not required to pay tax on any regulatory obligation ahead of time concerning the pay they get from the business they are occupied with, as referenced in the provisions of section 44AD. Thus, the presumptive taxation scheme comes as a great relief for small taxpayers under Section 44AD.

What kind of businesses are not eligible for presumptive taxation scheme?

As per Section 44AD of the Income-tax Act, the following types of business are not eligible for presumptive taxation:

  • Any business referred under Section 44AE (Plying, hiring or leasing goods carriages)
  • Any agency business
  • A person who is earning through commission or brokerage.
  • Any person or business whose total turnover or gross receipts exceeds Rs. 2 Crore.

What are the professions not eligible for presumptive taxation Section 44AD?

A person who is carrying any of the following profession under Section 44AA(1) is also not eligible for presumptive taxation under Section 44AD:

  1. Engineering
  2. Legal
  3. Medical
  4. Architecture
  5. Accountant
  6. Technical consultant
  7. Interior decoration or any other profession

How to calculate business income for a person opting for the presumptive taxation under section 44AD?

Generally, the income tax of a person carrying business is calculated under a normal provision under the income-tax act and he needs to maintain books of accounts and get his accounts audited.

But, in case a person adopting the presumptive taxation scheme u/s 44AD, then he needs to calculate his income tax as follows:

  1. The income is calculated at the rate of 8% of the turnover or gross receipts of the business.
  2. The income is calculated at the rate of 6% of the turnover or gross receipts if your business income is received by cheque, bank draft or electronic transaction through a bank account or any other digital mode.

This was introduced to encourage small businesses to take up the digital transaction. Moreover, section 44AD was amended. And it came into effect from the assessment year 2017-18. A person opting for presumptive taxation under Section 44AD is liable to pay the whole amount on or before the 15th of March of the previous year.

Can a taxpayer claim any further deduction under Section 44AD?

No, a separate deduction is not allowed under this scheme. 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 allowed.

Is it required to maintain books of account under section 44AD?

If a person opts for a presumptive taxation scheme under Section 44AD and declares income at the rate of 6% or 8% of the turnover or gross receipts, then he is not required to maintain books of accounts as given under Section 44AA.

 

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A lawyer with 14 years' experience, Vikram has worked with several well-known corporate law firms before joining Vakilsearch.