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What is Presumptive Taxation Scheme?

A person engaged in business is required to maintain regular books of account under certain circumstances as per sections 44AA of Income-tax Act, 1961. The Income-tax Act has framed the presumptive taxation scheme under sections 44AD, sections 44ADA and sections 44AE to give the relief to small tax payers from this tedious work.

A person adopting the presumptive taxation scheme can declare income at a prescribed rate and in turn he/she can relieve from tedious job of maintenance of books of account.

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 and 44ADA are not covered by Presumptive Taxation Scheme under Section 44AD.

Who is eligible to take advantage of the Presumptive Taxation Scheme of 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:

  • Residential individual of India
  • Resident Hindu Undivided Families (HUFs)
  • Any Resident Partnership Firm (not Limited Liability Partnership Firm)

Note - Presumptive Taxation scheme under Section 44AD 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.

Which businesses are not eligible for Presumptive Taxation Scheme under Section 44AD?

Presumptive Taxation Scheme under Section 44AD is designed to give relief to small taxpayers engaged in any business, except some businesses. 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. Any business whose total turnover or gross receipts exceeds Rs. 2 Crore.
  4. A person carrying on profession as referred in Section 44AA(1).
  5. A person who is earning income in the nature of commission or brokerage.
  6. Insurance agents who are earning income in the nature of commission.

Calculation Process of Taxable Income 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.

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 for Partnership firms based on Presumptive Taxation Scheme under Section 44AD

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.

Amendment of Section 44AD

With effect from 1st April 2017 under section 44AD of the income tax act –

  • The condition in sub-section (2) shall be omitted
  • Sub-sections (4) & (5) shall be substituted with –
    1. Sub-section 4 – In accordance with the provisions of this section, any eligible assesse declares profit for any previous year or any of the five assessment years relevant to the previous year succeeding such previous year not as per provisions of sub-section (1), he shall not be entitled to claim the benefit for 5 assessment year under provisions of this section subsequent to the assessment year relevant to the previous year where the profit has not been declared as per provision of sub-section (1).
    2. Sub-section 5 – As per provision of sub-section (4), any eligible assesse whose total income exceeds the maximum amount which is not chargeable to income tax shall be required to maintain books of accounts along with the documents under sub-section (2) of section 44AA and get them audited to prepare an audit report under section 44AB.

As per clause (b) of sub clause (ii), for the words “1 Crore Rupees” occurring at the end, words “2 Crore Rupees” shall be substituted.

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