Presumptive Taxation Section 44AD, 44ADA, 44AE

Presumptive Taxation Scheme Section 44AD, Section 44ADA, Section 44AE

Presumptive Taxation Section 44AD, 44ADA, 44AE: Businesses not covered under the taxation scheme are not needed to maintain account books as prescribed under Section 44AA. Eligible taxpayers and qualified companies for whom the Presumptive Taxation Scheme of Sections 44AD, 44AE and 44ADA are designed.

For the welfare of small taxpayers from the tedious job of maintaining account books and getting the accounts inspected, the Income Tax Act has constructed the presumptive taxation scheme. The primary focus is for Section 44AD, Section 44ADA and Section 44AE. In this segment, one can learn about the various provisions as stated under the presumptive taxation scheme of Sections 44AD, 44AE and 44ADA.

What Does a Presumptive Taxation Scheme Mean?

According to the Income Tax Act, a person who is engaged in any business or a profession must manage regular account books and get their accounts audited further. To provide relief to such small taxpayers from these tedious jobs, the Income Tax Act has issued the presumptive taxation scheme where sections 44AD, 44AE and 44ADA are the most significant.

An individual adopting the presumptive taxation scheme may state income at a designated rate and, in turn, is released from the tiresome job of sustaining books of account and getting the accounts examined.

About Scheme of Presumptive Taxation

For the purpose of relief of small-scale taxpayers, the Income Tax Act has drafted two distinct presumptive taxation schemes as stated below:

  1. The presumptive taxation scheme of Section 44AD.
  2. The presumptive taxation scheme of Section 44AE.
  3. The presumptive taxation scheme of Section 44ADA.

Presumptive Taxation Scheme of Section 44AD

Who can enjoy the benefits of the presumptive taxation scheme of section 44AD? 

The Scheme of presumptive taxation under section 44AD is intended to grant relaxation to small taxpayers involved in any business (excluding the business of furnishing, hiring or renting of goods vehicles as introduced in section 44AE).

The following individuals can utilise the presumptive taxation scheme of section 44AD:

  1. An Individual Resident
  2. A resident of a Hindu Undivided Family
  3. A resident of a Partnership Firm (not Restricted Liability Partnership Firms)

In other words, the plan cannot be utilised by any non-resident or by any person other than a HUF, an individual, or a partnership firm (not a Limited Liability Partnership Firm).

This project cannot be utilised by anyone who has made any claims for deductions under section 10A/10AA/10B/10BA or the sections 80HH to 80RRB in the applicable year.

Which Businesses are not covered under the Scheme of presumptive taxation of section 44AD?

The Section 44AD under the Scheme is intended to free small-scale taxpayers engaged in any commercial activity, apart from the following businesses as stated:

  • Anyone involved in plying, leasing or hiring of goods carriages related to as in section 44AE.
  • An individual who is carrying any agency
  • An individual who is earning an income such as a commission or brokerage

Apart from the businesses as discussed above, a person bearing on any such business, as mentioned in section 44AA (1) of the Scheme, is not eligible for the presumptive taxation scheme.

The presumptive taxation plan of section 44AD cannot be adopted by an insurance agent.

  • An individual making an income such as a brokerage or commission is not an eligible candidate who can adopt the Scheme of presumptive taxation of section 44AD. An Insurance agent earns their income by way of commission and, therefore, they cannot expect to go for the presumptive Scheme of taxation of section 44AD.
  • A person involved in a position as designated under section 44AA (1) is ineligible to utilize the presumptive taxation scheme of section 44AD.
  • An individual who is involved in any profession as designated under section 44AA (1) cannot adopt the presumptive taxation scheme of section 44AD.
  • A person whose cumulative turnover or gross vouchers for the year surpass a sum of Rs.2,00,00,000 cannot use the presumptive taxation scheme of section 44AD.
  • The eligible individuals can select the presumptive Scheme of Taxation of section 44AD if the business’s gross receipts or total turnover does not surpass Rs. 2,00,00,000. In other words, if the cumulative turnover or gross receipt of the business surpasses Rs. 2,00,00,000 then this Scheme of section 44AD cannot be utilised.

Commonly, as per the Income-tax Act, for any taxable business income of every person is computed as stated below:

Particulars Amount
Gross receipts or Turnover from the business X
Less: Expenses suffered in relation to earning an income (X)
Chargeable Business Income X

Method of calculating taxable business income under the standard provisions as stated under the Income-tax Act, i.e., that says, in case of an individual not adopting the presumptive taxation scheme of section 44AD.

To calculate taxable business income in the manner as stated above, the taxpayers have to maintain books of account of the business. Pay will be calculated based on the information revealed in the books of account.

The method of calculation of chargeable business income in the case of an individual utilizing the presumptive Scheme of taxation under section 44AD

In the case of an individual adopting the said plans of section 44AD, revenue is computed on a presumptive basis at 8% of the turnover or the gross receipts of the available business for a particular annum.

To promote digital transactions and to support small, disorganised businesses to allow digital payment methods under section 44AD is revised with effect from the year of assessment 2017 to 2018 to provide the computed income at the rate of 6% instead of 8%.

If the turnover or gross receipt is obtained by an account recipient cheque or an account recipient bank draft or the use of computerised clearing system through a bank account or such other electronic form as prescribed during the preceding year or before the scheduled date of filing the return under section 139(1).

Therefore, in the case of a person choosing the provisions of section 44AD, income will not be estimated in the usual manner as discussed earlier (i.e., turnover fewer Expenses) but will be determined at the rate of 6% or 8%, as the case might be, as per the gross receipt or turnover.

However, a person may willingly publish his business income at higher than 8% or 6%, as the situation may be, of gross receipt or turnover.

According to the prescribed rate, the presumptive income calculated is the final income, and no further expenses will be allowed or forbidden.

Under the standard provisions of the Income-tax Act, taxable business income will be computed after allowing deduction in respect of expenses that are deductible as per the Income-tax Act and after disallowing costs that are not deductible as per the Income-tax Act.

In the case of a person opting for the presumptive taxation scheme of section 44AD, the provisions as allowed or disallowed are provided to the individual under the Income-tax Act will not apply.

The income calculated at the presumptive rate of 6% or 8% will be the ultimate taxable income of the business included under this Scheme of presumptive taxation.

According to the prescribed rate, the income calculated will be the final taxable income of the company included under the presumptive taxation scheme and no additional expenses will be allowed or disallowed.

While computing income according to section 44AD, a separate deduction on account of the decrease is unavailable. However, the value of any asset used as noted in such businesses should be computed as if decline as per section 32 is asserted and has been allowed.

There is no need to maintain an account book as suggested under section 44AA.

44AA deals with provisions related to the preservation of books of account by a person engaged in businesses or professions. Thus, a person involved in a business or career has to maintain account books of their business or profession as per section 44AA.

In the case of an individual engaged in any business and are going for the presumptive taxation scheme, the requirements of section 44AA related to the maintenance of account books will not be applied. In other words, if a person utilizes the provisions of section 44AD and declares income at the rate of 6% or 8% (as per the case) of the turnover, then they need not maintain the account books as rendered for under section 44AA concerning businesses covered under this Scheme of presumptive taxation of section 44AD.

Paying of tax in advance in respect of income from businesses is also covered under section 44AD.

Anyone selecting the presumptive taxation scheme under subdivision 44AD a liable candidate who must pay the total amount of advance tax before or on the day of 15th March of the last year. If they fail to pay the advance tax by 15th March of the previous year, they should be liable to pay interest as per section 234C.

Please note: Any sum paid by way of advance tax before or on 31st March should also be managed as advance tax paid during the business year closing on that day.

Procurements to be utilised if an individual has not chosen the presumptive taxation scheme of subsection 44AD and has declared income at a lower rate, it is at less than 8%.

Anyone can declare income at a lower rate (which is at less than 6% or 8%). But, if they do so, and their income surpasses the maximum amount that is not chargeable to tax, they are needed to maintain the books of account as per the provisions of section 44AA and have to get their accounts reviewed as per section 44AB.

Outcomes if a Person Opts out of Presumptive Taxation Scheme of Section 44AD

If individuals choose a presumptive taxation scheme, then they also need to follow the same process over the next five years. If they fail to achieve this, then the presumptive taxation scheme will not be available for them for the next five years.

For example, an assessee claiming to be taxed on a presumptive basis under Section 44AD for the years 2021 and 2022. However, for the AY of years 2021 to 2022, they did not go for a presumptive taxation Scheme.

In that case, he will not be eligible to claim the benefit of the presumptive taxation scheme for the subsequent five AYs, i.e., from AY of the years 2022 and 2023 to 2026 and 2027.

Furthermore, they are required to keep and maintain account books, and they are also liable for tax auditing as per division 44AB from the AY, in which they opt out of the presumptive taxation scheme. [If their net income surpasses the maximum amount not chargeable to tax].

Presumptive Taxation Scheme of Section 44ADA

Who can enjoy the benefits of the presumptive taxation scheme of section 44ADA? 

The scheme of presumptive taxation of section 44ADA is intended to give assistance to small taxpayers engaged in a specified profession. Persons who can enjoy benefits of the presumptive taxation scheme of section have to be residents in India engaged in the following professions:

  1. Judicial
  2. Medical
  3. Architectural or Engineering
  4. Accountant
  5. Technical consultant
  6. Interior decorator
  7. Other professions as stated by CBDT.

The Finance Act of 2021 has revised provisions of section 44ADA to determine eligible assessees. With effect from the Assessment Year 2021 to 2022, the advantage of section 44ADA is suitable only in the case of an assessee who is:

  1. An Individual
  2. Partnership worker other than a Limited Liability Partnership as mentioned under clause (n) of subdivision (1) of Division 2 of the Limited Liability Partnership Act.

Method Of Calculation Of Taxable Income In The Case Of A Person Choosing The Presumptive Taxation Scheme Of Section 44ADA

In the case of an individual adopting the provisions of section 44ADA, benefits will be computed on a presumptive basis, that is, at the rate of 50% of the gross receipts of the profession. But such an individual can declare income higher than 50%.

In the case of an individual adopting section 44ADA, income will not be computed in the usual manner but will be calculated at the rate of 50% of the total receipts.

The presumptive income calculated at the rate of 50% is the annual income, and additional expenses will be prohibited.

A person who utilizes the presumptive taxation scheme is considered to have claimed all inference of expenses. Any further claim of speculation is not allowed after declaring profit @ 50%.

While computing income according to section 44ADA, separate deduction on record of depreciation is unavailable. However, the noted value of any such asset used in such business should be assessed as if reduction as per section 32 is claimed and has been indeed allowed.

Payment of Advance Tax in Regard to Income from Businesses Covered under Section 44ADA

Any individual opting for the presumptive taxation scheme under section 44ADA is subjected to pay the total amount of advance rate before or on 15th March of the last year. If he fails to clear the advance tax by 15th March of the last year, he should be responsible for paying interest according to section 234C.

The Maintenance of Account Books if an Individual Opts for Presumptive Scheme of Taxation for Section 44ADA

In the case of a person working in a specific profession as referred in section 44AA (1) and chooses this scheme of section 44ADA, the requirement of section 44AA related to the preservation of books of account will not apply. In other words, if a person chooses the criteria of section 44ADA and declares income at 50% of the total receipts, then he is not needed to sustain the account book in respect of the specified profession.

Procurements to be implemented if a person does not opt for the scheme of presumptive taxation (section 44ADA) and states his income from the service at a lower rate (of less than 50%).

A person may claim income at a lower rate (of less than 50%). However, suppose he does so, and his salary tops the maximum amount, which is not liable to tax. He must manage the books of account as per the requirements of segment 44AA and have to get his statements inspected per section 44AB.

Presumptive Taxation Scheme of Segment 44AE 

Application of the presumptive taxation system of section 44AE

The plan of section 44AE is intended to give aid to small taxpayers involved in plying, leasing or hiring goods carriages.

Suitable taxpayer and suitable business for the presumptive taxation scheme of segment 44AE

The provisions of section 44AE apply to every person (like an individual, HUF, company, firm, etc.).

The presumptive taxation system of section 44AE can be adopted by a person who is involved in the profession of plying, leasing or hiring goods carriages and who does not possess more than ten goods vehicles at a time during the year.

A person who owns above ten goods means of transport cannot adopt the presumptive taxation system of section 44AE

The presumptive scheme of taxation of section 44AE can be selected by a person involved in plying, leasing or hiring goods vehicles and who does not possess more than ten goods vehicles during the year.

The essential principle of the scheme is the restriction on owning not more than ten goods vehicles at any time during the year. Thus, if a person owns more than ten goods vehicles during the year, they cannot enjoy the benefits of this scheme.

The method of calculating taxable business income in case of a person choosing the presumptive taxation scheme of section 44AE.

In the case of a person willing to opt for the presumptive taxation method of section 44AE, pay will be determined on an estimated basis.

For Heavy Goods Vehicle, income will be calculated at the rate of Rs. 1,000 per ton of whole vehicle weight for each month or section of a month during which the taxpayer owns the heavy goods vehicle. In vehicles other than heavy goods vehicles, income will be calculated at the rate of 7,500 for each month or portion of any month during which the taxpayer owns the carriage of the goods. The portion of the month would be considered as an entire month.

Note: If the original income is larger than the presumptive rate, i.e., larger than Rs. 1,000 or Rs. 7,500, then such higher pay can be claimed.

Note: “Heavy Goods Vehicle” indicates any goods carriage possessing a total vehicle weight surpassing 12,000 kilograms.

Example: Mr. X is employed in the business of plying, leasing or hiring of goods carriage. From 2021 to 2022, he owned nine goods transports (other than heavy goods transports). What will be the taxed income from the profession of plying, leasing or hiring of goods carriages if he chooses the provisions of section 44AE?

According to the requirements of section 44AE, for Heavy Goods Vehicle, pay will be calculated at the rate of Rs. 1,000 per ton of whole vehicle weight for each month or fraction of a month through which the taxpayer holds the heavy goods vehicle.

In transports other than heavy goods vehicles, pay will be calculated at the rate of 7,500 for each month or fraction of a month through which the taxpayer holds the carriage of the goods.

In the current case, Mr. X held nine goods transports (other than heavy goods transports) all over the year and, therefore, income will be calculated as stated below:

Particulars Amount
Income each month per goods transport 7,500
The no. of goods vehicles  9
Once-a-month pay as per the requirements of section 44AE from nine goods transports 67,500
The no. of months in one year through which the transports were held 12
Gross income from business of plying, leasing or hiring goods carriages as per the provisions of section 44AE 8,10,000

Example: Mr. Y is engaged in the business of plying, leasing, or hiring goods carriages. He held five heavy goods transports having a total weight of 13,000 kilograms and four other goods transports during the last year 2021 to 2022. What is his taxable income according to the provision?

According to the requirements of section 44AE, for Heavy Goods transport, pay will be computed at the rate of Rs. 1,000 per ton of total transport weight for each month or portion of a month during which the taxpayer owns the heavy goods transport. In transports other than heavy goods vehicles, income will be computed at the rate of 7,500 for each month or portion of any month through which the taxpayer owns the carriage of the goods.

In the present case, Mr. Y owned nine goods transports in which 5 are heavy goods vehicles with a gross weight of 13,000 Kilograms. Hence, income will be computed as follows:

Specifics Amount
Income each month per heavy goods transport (13,000 kilograms i.e., 13 ton) 1,000 x 13
Number of heavy goods transports 5
Monthly income for heavy goods vehicle as per the provisions of section 44AE 65,000
Number of months in each year 12
Gross income as per the requirements of segment 44AE from heavy goods transport (A) 7,80,000
The income per month per goods transport (other than heavy transport) 7,500
Number of transports except for heavy goods transport 4
Per month income as in case of transports other than heavy goods transport as per the requirements of segment 44AE 30,000
Number of months in each year 12
Gross income as per the provisions of section 44AE from vehicles other than heavy goods vehicle(B) 3,60,000
Gross income from the business of plying, leasing or hiring goods carriages as per the provisions of section 44AE (A+B) 11,40,000

The presumptive pay calculated at the rate of Rs. 1,000 per ton or Rs. 7,500 per assets carrier every month is the ultimate income, and no further charges will be allowed or denied.

Under the standard provisions of the Income-tax Act, taxable business income will be computed after allowing deduction in respect of expenses that are deductible as per the Income Tax Act and after disallowing costs that are not deductible as per the Income-tax Act.

If a person choosing the presumptive taxation scheme of segment 44AE, allowances or disallowances as given for under the Income Tax Act will not apply and income computed at the presumptive rate Rs. 1,000 or Rs. 7,500 will be the ultimate income. The income calculated at the rate of Rs. 1,000 or Rs. 7,500 per goods transport per month will be the business’s final taxable income.

But, in the case of a taxpayer of a partnership, choosing for the presumptive taxation method from the income calculated at the presumptive rate of Rs. 7,500 for each goods vehicle per month, an additional reduction can be claimed on record of remuneration and interest given to partners (calculated as per the Income-tax Act).

While calculating pay as per the requirements of segment 44AE, separate deduction on depreciation is unavailable.

However, the person in charge should calculate the noted value of any asset used in this business with depreciation as mentioned in section 32.

There Is No Need To Manage Account Books As Instructed Under Segment 44AA

Segment 44AA of the Income-tax Act, 1961 has instructions related to preserving account books by a person involved in business or profession. Thus, a person involved in business or career has to maintain books of account of his business or job according to the provisions of section 44AA.

In the case of a person choosing for the presumptive taxation plan of segment 44AE, the requirements of section 44AA related to the preservation of books of account will not be implemented. In other words, if a person choosing the criteria of segment 44AE and declares his pay at the rate of Rs. 7,500 for each goods transport every month; they are not needed to sustain the books of account as given for under segment 44AA in respect of the company as covered under the presumptive taxation scheme of segment 44AE.

There is no concession regarding the amount of advance tax in the case of an individual who chooses the presumptive taxation plan of section 44AE and; therefore, they will be responsible for paying advance tax even if they adopt the presumptive taxation system of section 44AE.

Provisions to be implemented if a person does not go for the presumptive taxation system of section 44AE and states pay at a lower rate, at less than Rs. 1,000 for every ton or Rs. 7,500 per goods transport per month.

A person can declare his income at a lower rate (i.e., at less than Rs. 1,000 every ton or Rs. 7,500 per goods vehicle per month). However, if he does so, he must maintain the books of account as per the provisions of section 44AA and have to get his accounts audited under section 44AB.

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