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Overview

Income Tax Act of Government of India introduced this Presumptive Taxation Scheme. This scheme was introduced as a means via which the small tax payers can get some form of relief in the process of making their income tax payments. This Presumptive taxation scheme is helpful to the small tax payers in performing such tasks as the auditing of their accounts and maintaining the account ledger of their accounts.

This presumptive taxation scheme allows any individual, who wishes to avail this particular scheme, to declare his or her total income that is taxable under Income Tax Act. She/he has to now pay the income tax at a pre-defined rate. The person, who is availing the benefits of this scheme also gets some good relief from the tedious and strenuous task of maintaining their accounts and getting their accounts audited.

The Department of Income Tax and the Income Tax Act has announced introduction of two types of presumptive taxation schemes, to provide certain relief to small tax payers. These schemes are:

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

What is Presumptive Taxation scheme under Section 44AD?

What is Presumptive Taxation scheme under Section 44AD?

Department of Income Tax and the Income Tax Act framed and introduced this Presumptive Taxation Scheme under Section 44AD. This scheme helps the small tax payers by easing their tax burden. These small tax payers may be involved in doing any kind of small scale business, which keeps their taxability at a lower rate. The businesses those are mentioned under Section 44AE are not covered by Presumptive Taxation Scheme under Section 44AD.

Criteria of Eligibility for Presumptive Taxation Scheme Under Section 44AD:

The persons or individuals, who are eligible to avail the benefits of Presumptive Taxation Scheme under Section 44AD of Income Tax Act, are:

  • Any one who is a resident of India.
  • Hindu Undivided Families or HUFs, those who are residents of India.
  • Any partnership firm, where the partners are residents of India.

Any one, in the above mentioned categories, is eligible to adopt this Presumptive Taxation Scheme under Section 44AD. But the beneficiaries must have claimed the tax deductions for the relevant year of assessment. This should have been done under the under mentioned Sections:

  1. Section 10A
  2. Section 10AA
  3. Section 10B.
  4. Section 10BA
  5. 80 HH.
  6. Section 80 RRB.

The under mentioned persons or individuals are not eligible to avail the benefits of the Presumptive Taxation Scheme under Section 44AD:

Names of the businesses, those are not covered under Presumptive Taxation Scheme under Section 44AD:

There are a few exceptions regarding the types of businesses the small tax payer may be doing, who are not eligible to avail the benefits of provisions allowed under Presumptive Taxation Scheme under Section 44AD, though this scheme has been designed to provide relief to all small tax payers. These businesses are:

  1. Any business under section 44AE that involves the renting, hiring or plying of goods carriages.
  2. Any business related to agencies.
  3. Individuals who receive commission or income, related to brokerage.
  4. Any individual who is involved in any profession mentioned under section 44AA (1).
  5. Insurance agents, since any income they receive is via commission.
  6. Any individual who earns gross income of more than Rs 1 lakh per year. However, an exception to this rule arises if the gross income is not more than the audit limit of Rs 1 lakh, as outlined in section 44AB.

Calculation Process of Taxable Income for eligible persons, who are availing the Presumptive Taxation Scheme under Section 44AD:

Any person who wishes to avail the benefits of Presumptive Taxation Scheme under Section 44AD, will have to get her/his taxable income calculated on the basis of presumption. That person’s presumptive income will be calculated at the rate of 8% of her/his annual turnover or her/his gross income.

This final calculation of Income the individual at the rate of 8% will be considered as the final absolute income of the individual. No extra expenditure will be considered after making this final absolute income of the individual.

Difference between calculation of Taxable Business Income under normal circumstances and Calculation of Taxable Business Income based on Presumptive Taxation Scheme under Section 44AD:

Taxable Business Income under Normal Circumstances-

Any taxable income received from any business is calculated, following the deduction of any expenditure that has been deemed to be deductible according to the guidelines of the Income Tax Act, as well as the disallowance of any expenditure that has been deemed unfit to be deductible according to the guidelines of the Income Tax Act.

Taxable Business Income based on Presumptive Taxation Scheme under Section 44AD-

For those individuals, who have adopted the presumptive taxation scheme of section 44AD, taxable income received from business is calculated at an 8 per cent rate of presumption, wherein deductible and non-deductible expenses outlined by the Income Tax Act are not applicable. This will be considered to be the business’ final and absolute taxable income, and no additional expenditure will be considered.

Taxable Business Income based on Presumptive Taxation Scheme under Section 44AD for Partnership firms.

Following the taxable income calculated at 8 percent as mentioned previously, additional deductions will be allowed to be claimed on the following-

  • Remuneration paid to partners of the firm.
  • Interest received by the partners of the firm.
  • Deductions cannot be claimed in the event of depreciation, although the value of assets owned by the business will be calculated on the basis of assumed depreciation under section 32.

Amendments made in Section 44AD, by the Finance Bill 2016-

The Presumptive Taxation Scheme has already witnessed five amendments, under different sub sections. They are Section 44AD (1). Section 44AD (2). Section 44AD (3). Section 44AD (4). Section 44AD (5). These amendments have brought into new changes in this Presumptive Taxation Scheme under Section 44AD, which are for the benefits of the small tax payers.