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Generally, a person carrying on business or profession maintains books of accounts and prepares a balance sheet and a profit or loss account to understand the financial position of his business or profession for a financial year.

Under the income tax laws, a person engaged in prescribed business or profession is required to mandatorily maintain books of account, prepare financial statements and get his accounts audited. Further, profit/loss as per such financial statements would be considered to arrive at taxable profits after making necessary adjustments.

However, in order to provide relief to small taxpayers from the tedious job of maintaining regular books of account and getting them audited, income tax law has introduced presumptive taxation scheme.

In this article we would cover the following topics:

What is presumptive taxation?

Presumptive taxation scheme under Section 44AD, 44AE and 44ADA

i. Eligible taxpayer

ii. Eligible business

iii. Prescribed income

iv. Specific exclusions

v. Additional provisions

vi. Payment of advance tax

What happens if taxpayer would like to claim profit lower than the prescribed rate based on the actual earnings?

Is it necessary to opt for presumptive taxation scheme for minimum number of years once opted in Year 1?

What is presumptive taxation?

Presumptive taxation scheme lets the taxpayers declare their taxable income at a prescribed rate irrespective of actual profit/gains and in turn relieves them from the burden of maintaining regular books of account and getting the same audited.

Presumptive taxation schemes to relieve small taxpayers are provided under Section 44AD, 44ADA and 44AE. While Section 44ADA is for professionals Section 44AD and 44AE concerns small business taxpayers. Let us understand them in detail.

Presumptive taxation scheme under Section 44AD, 44AE and 44ADA

 

Particulars Section 44AD Section 44AE

44ADA

Eligible taxpayer Resident Individual, Resident HUF, Resident Partnership firm (excludes LLPs) and
Who has not claimed any profit linked deductions (i.e., Section 10A, 10AA, 10B, 10BA) and deductions under Section 80HH to 80RRB
Any taxpayer who owns not more than 10 goods carriages at any time during tax year
Owns” also means goods carriage taken on hire or installment where the amount payable is still due
Resident taxpayer
Eligible business/ profession Any business other than business covered under Section 44AE Business of plying, hiring or leasing of goods carriages Legal, medical, engineering or architectural, accountancy profession, technical consultancy, interior decoration or any other profession notified by the Board in the official gazette
Monetary threshold Total turnover or gross receipts not exceeding Rs 2 crores Not applicable Total gross receipts not exceeding Rs 50 lakhs
Prescribed / presumptive income
  • 6% of total turnover or gross receipts of a tax year received by account payee cheque/bank draft, ECS through bank account on or before due date of filing the return of income
  • 8% of total turnover or gross receipts of a tax year in all other cases
Rs 7500 per goods carriage for every month or part of the month during which the goods carriage is owned by the taxpayer in the tax year

Or Amount claimed to be actually earned
Whichever is higher

50% of total gross receipts in a tax year
Person specifically excluded
  • Person carrying on specified profession
  • Person earning commission or brokerage income
  • Person carrying on agency business
Not applicable Not applicable
Additional provisions
  • No other deductions for business expenses which are normally allowed can be claimed for eg. depreciation, rent, administrative expenses etc
  • Written down value of assets can be computed as if depreciation is and has always been claimed
  • No other deductions for business expenses which are normally allowed can be claimed for eg. depreciation, rent, administrative expenses etc
  • Is such taxpayer is a partnership firm, salary and interest paid to partners is allowed as deduction from prescribed income above
  • Written down value of assets can be computed as if depreciation is and has always been claimed
  • No other deductions for business expenses which are normally allowed can be claimed for eg. depreciation, rent, administrative expenses etc
  • Written down value of assets can be computed as if depreciation is and has always been claimed
Payment of advance tax Entire advance tax can be paid by last installment of advance tax i.e., 15 March of a year
In case of failure to do so, interest is leviable @ 1% on shortfall as per Section 234C
No concession in payment of advance tax. Same shall be paid in four installments as per advance tax provisions Entire advance tax can be paid by last installment of advance tax i.e., 15 March of a year
In case of failure to do so, interest is leviable @ 1% on shortfall as per Section 234C

Note: Any amount paid by way of advance tax on or before 31st day of March shall also be treated as advance tax paid during the financial year ending on that day.

What happens if taxpayer would like to claim profit lower than the prescribed rate based on the actual earnings?

Any person carrying on eligible business or profession under Section 44AD or 44AE or 44ADA and claims profit lower than the prescribed income, is not allowed to enjoy the relief given for maintenance of books of account and audit. Consequences of claiming lower profit than the prescribed rate is as follows:

Section 44AD – Regular books of accounts to be maintained if income exceeds maximum amount not chargeable to tax and audit shall be carried out if conditions as per provisions of Section 44AB are fulfilled.

Section 44AE – Regular books of account shall be maintained and audit shall be carried out irrespective of turnover or income

Section 44ADA –  Regular books of accounts to be maintained and get them audited if income exceeds maximum amount not chargeable to tax

Is it necessary to opt for presumptive taxation scheme for minimum number of years once opted in Year 1?

Section 44AD – As per Section 44AD, where a taxpayer opts for presumptive taxation scheme for any of the financial year he is required to continue to opt for the same for next 5 years. If he fails to do so, he will not be eligible to opt for presumptive taxation scheme u/s 44AD for 5 years succeeding the year in which he opts out. Further, with respect to those 5 financial years where taxpayer is ineligible to opt for presumptive taxation scheme u/s 44AD, regular books of account need to be maintained and audit shall be conducted if total income exceeds maximum amount not chargeable to tax.

For example, if taxpayer has opted for presumptive taxation under Section 44AD for Year 1 and Year 2 but opts out of it in Year 3, then the taxpayer would not be eligible to opt for presumptive taxation from Year 4 to Year 8.

Section 44AE and 44ADA – No such conditions

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