The Indian Income Tax Act provides a beneficial scheme called the Presumptive Taxation Scheme, designed to ease the tax compliance burden for small businesses, professionals, and transporters. This scheme allows eligible taxpayers to declare income at a prescribed rate on their turnover or gross receipts, without maintaining detailed books of accounts or undergoing audit, thereby simplifying the taxation process.
In this blog, we present a clear and detailed overview of Sections 44AD, 44ADA, and 44AE, explaining who can opt for this scheme, how income is calculated under it, and important compliance considerations.
Understanding Presumptive Taxation
Presumptive taxation is a method of computing taxable income on a presumptive basis, which means income is assumed at a fixed percentage of turnover or gross receipts. This eliminates the need for maintaining complex books and reduces the cost and effort involved in filing taxes.
Section 44AD: For Small Businesses
Section 44AD caters to small businesses (except those engaged in professions, commission agents, or agencies). To be eligible:
- The taxpayer must be an individual, Hindu Undivided Family (HUF), or partnership firm (excluding LLPs).
- The total turnover or gross receipts must not exceed ₹3 crore in a financial year (the limit was increased from ₹2 crore, especially for those who conduct over 95% transactions digitally).
Income Computation:
- The income is presumed to be 8% of the total turnover or gross receipts.
- If more than 95% of receipts are digital, the rate is reduced to 6%.
- No need to maintain books of accounts or get accounts audited.
Important Points:
- Once opted, the taxpayer cannot claim any other expenses.
- If the taxpayer opts out of this scheme, they must maintain regular books and get their accounts audited for the next five years.
Section 44ADA: For Professionals
This section is applicable to professionals such as doctors, lawyers, architects, engineers, accountants, technical consultants, and other specified professionals.
Eligibility:
- The individual must be a resident.
- Gross receipts must not exceed ₹75 lakhs during the financial year.
Income Computation:
- 50% of the gross receipts are presumed as income.
- No need to maintain detailed books or get accounts audited.
Key Considerations:
- If the actual profit is less than 50%, the taxpayer can declare the lower income only if books are maintained and accounts are audited (if income exceeds exemption limits).
Section 44AE: For Goods Carriage Owners
This section is designed for those engaged in the business of owning goods vehicles.
Eligibility:
- Applicable if the taxpayer owns not more than 10 goods vehicles at any time during the year.
Income Computation:
- Presumed income is calculated at ₹1,000 per ton of the gross vehicle weight per month for heavy goods vehicles.
- For other vehicles, a flat income of ₹7,500 per month or part thereof per vehicle is presumed.
Benefits:
- No requirement to maintain books of accounts.
- Simplified income calculation.
Advantages of Presumptive Taxation
- Simplifies tax compliance by reducing paperwork.
- Saves costs on bookkeeping and audits.
- Provides certainty on taxable income.
- Suitable for small taxpayers with limited resources.
Important Cautions
- Taxpayers must ensure they do not exceed turnover or receipt limits.
- Choosing presumptive taxation disallows claiming actual expenses.
- Opting out has consequences like mandatory audit for five years.
- Professional advice is recommended to decide if the scheme suits your financial profile.
Conclusion
The presumptive taxation scheme under Sections 44AD, 44ADA, and 44AE offers a streamlined path for small taxpayers to meet their tax obligations with minimal compliance burden. By understanding the eligibility and computation methods, small businesses, professionals, and transporters can make informed choices and enjoy the benefits of simplified tax filing.
Always consult a Chartered Accountant to determine the best tax strategy suited to your individual or business needs.
