Presumptive Taxation Scheme – 22 Important FAQ’s

1. What is the Meaning of Presumptive Taxation Scheme under Income Tax Act,1961?

Presumptive taxation scheme under Income Tax Act, 1961 is a simplified taxation scheme for small businesses and professionals.

Under this scheme, taxpayers are allowed to declare their income at a prescribed rate, which is a percentage of their gross receipts or turnover, instead of maintaining detailed books of accounts and getting their accounts audited. This scheme is designed to reduce the compliance burden for small taxpayers who may not have the resources to maintain proper accounting records.

The presumptive taxation scheme is available to businesses with a turnover of up to Rs. 2 crores and professionals with gross receipts of up to Rs. 50 lakhs. The prescribed rate of income for different businesses and professions varies and is specified in the Income Tax Act.

Taxpayers opting for the presumptive taxation scheme are required to file their tax returns in a simplified manner, and they are not required to maintain books of accounts or get their accounts audited unless their income exceeds the prescribed limit.

However, taxpayers who choose to use this scheme cannot claim deductions for certain expenses such as depreciation, interest on loans, and expenses related to research and development.

2. For whom the Taxation Scheme of Section 44AD of the Income Tax Act 1961, is designed?

The presumptive taxation scheme under section 44AD of the Income Tax Act, 1961 is designed for eligible resident individuals, Hindu Undivided Families (HUFs), and partnerships (excluding Limited Liability Partnerships) with a turnover of up to Rs. 2 crores.

The scheme is primarily aimed at easing the compliance burden for small taxpayers by allowing them to pay tax on a presumptive basis, without the need to maintain detailed books of accounts. Under this scheme, the eligible taxpayers can declare a certain percentage of their gross receipts or turnover as their taxable income.

As per section 44AD, eligible taxpayers can declare a presumptive income at a minimum rate of 8% of their total turnover or gross receipts. However, if the actual income earned by the taxpayer is higher than the presumptive income, the taxpayer can declare the actual income earned and pay tax on that income.

It is important to note that taxpayers who opt for this scheme are not allowed to claim any deductions for expenses related to the business or profession. In addition, they are also not required to get their accounts audited unless their total income exceeds the maximum amount not chargeable to tax.

Overall, the section 44AD presumptive taxation scheme is a beneficial scheme for small taxpayers as it offers a simplified way to calculate and pay taxes, while also reducing the compliance burden.

3. Which Businesses are not covered under the presumptive taxation scheme of section 44AD?

While the presumptive taxation scheme under section 44AD of the Income Tax Act, 1961 is designed to ease the compliance burden for small taxpayers, there are certain businesses and professions that are not covered under this scheme.

The following businesses are not eligible for the presumptive taxation scheme under section 44AD:

1. Any business whose total turnover or gross receipts exceed Rs. 2 crores in a financial year.
2. A person carrying on business as a proprietor of more than one business.
3. A person carrying on a profession as a doctor, architect, engineer, accountant, lawyer, or other specified profession.
4. A person earning income in the nature of commission or brokerage.
5. Any business or profession that has claimed deductions under sections 10AA, 32AD, 33AB, 33ABA, or 35AD or has invested in certain eligible assets.
6. Any business or profession that has claimed relief under section 87A.
7. Any person who is a resident and has any income from sources outside India.

It is important to note that even if a taxpayer is eligible for the presumptive taxation scheme under section 44AD, they may choose not to opt for it and instead maintain detailed books of accounts and get their accounts audited as required under the Income Tax Act.

4. Can An insurance agent adopt the presumptive taxation of section 44AD?

No, an insurance agent is not eligible to adopt the presumptive taxation scheme of section 44AD under the Income Tax Act, 1961. The scheme is primarily designed for eligible resident individuals, Hindu Undivided Families (HUFs), and partnerships (excluding Limited Liability Partnerships) engaged in specified businesses or professions, with a turnover of up to Rs. 2 crores.

Insurance agents are not included in the list of eligible professions under this scheme. Therefore, they are required to maintain detailed books of accounts and get their accounts audited if their total income exceeds the maximum amount not chargeable to tax.

However, if the insurance agent is also engaged in any other eligible business or profession covered under section 44AD and meets the eligibility criteria, they can opt for the presumptive taxation scheme for that business or profession. But their income from the profession of insurance agent cannot be covered under this scheme.

5. Can a person engaged in a profession as prescribed under section 44AA(1) adopt the presumptive taxation of section 44AD?

No, a person engaged in a profession as prescribed under section 44AA(1) is not eligible to adopt the presumptive taxation scheme of section 44AD under the Income Tax Act, 1961. Section 44AA(1) prescribes the professions who are required to maintain books of accounts under the Act, and they include doctors, lawyers, engineers, architects, accountants, technical consultants, and other similar professions.

The presumptive taxation scheme of section 44AD is only applicable to eligible resident individuals, Hindu Undivided Families (HUFs), and partnerships (excluding Limited Liability Partnerships) engaged in certain eligible businesses with a turnover of up to Rs. 2 crores. The scheme is not applicable to professionals who are required to maintain books of accounts under section 44AA(1) of the Income Tax Act.

Therefore, if a person is engaged in a profession as prescribed under section 44AA(1), they are required to maintain proper books of accounts and get their accounts audited as per the provisions of the Income Tax Act, and they cannot opt for the presumptive taxation scheme of section 44AD.

6. Can A person whose total turnover or gross receipts for the year exceed Rs. 2,00,00,000 (Rupees Two Crores) adopt the presumptive taxation scheme of section 44AD?

No, a person whose total turnover or gross receipts for the year exceed Rs. 2,00,00,000 (2 crores) is not eligible to adopt the presumptive taxation scheme of section 44AD under the Income Tax Act, 1961.

Section 44AD is applicable to eligible resident individuals, Hindu Undivided Families (HUFs), and partnerships (excluding Limited Liability Partnerships) engaged in certain eligible businesses with a turnover of up to Rs. 2 crores. If the turnover or gross receipts exceed Rs. 2 crores, then the taxpayer is required to maintain proper books of accounts and get them audited as per the provisions of the Income Tax Act.

Therefore, a person whose turnover or gross receipts for the year exceed Rs. 2 crores cannot adopt the presumptive taxation scheme of section 44AD and is required to maintain proper books of accounts and get them audited.

7. What is The manner of computation of taxable business income in case of a person adopting the presumptive taxation scheme of section 44AD?

If a person adopts the presumptive taxation scheme of section 44AD, then the taxable business income is calculated as follows:

• The total turnover or gross receipts from the eligible business is deemed to be 8% of the total turnover or gross receipts for the financial year. This is deemed to be the person’s income from the eligible business, and no further deductions or expenses are allowed to be claimed against it.
• If the total income, including the presumptive income from the eligible business, exceeds the basic exemption limit, which is currently Rs. 2.5 lakhs for individuals and HUFs, then the person is required to pay tax on the excess amount at the applicable tax rate.
• If the person wishes to declare a lower income than 8% of the total turnover or gross receipts, then they are required to maintain proper books of accounts and get them audited.

It is important to note that once a person adopts the presumptive taxation scheme of section 44AD for a particular financial year, they are required to continue with it for the next five financial years, unless the person’s turnover or gross receipts exceed Rs. 2 crores or the person opts out of the scheme.

8. Is The presumptive income computed as per the prescribed rate, the final income and Will the further expenses be allowed or disallowed?

In case a person adopts the presumptive taxation scheme of section 44AD, the presumptive income computed at the prescribed rate of 8% is deemed to be the final income from the eligible business. No further expenses, deductions or allowances can be claimed against this income, as it is deemed to have taken into account all expenses and deductions.

This means that the person cannot claim any additional expenses or deductions against the income deemed under the presumptive taxation scheme of section 44AD. However, the person can claim deductions for any other income or gains earned during the financial year, such as income from salary, house property, capital gains or any other source.

It is important to note that if a person wishes to declare a lower income than 8% of the total turnover or gross receipts, then they are required to maintain proper books of accounts and get them audited. In such cases, the actual income computed as per the books of accounts will be considered as the final income, and the person can claim expenses and deductions against it as per the provisions of the Income Tax Act.

9. Do the taxpayer adopting presumptive taxation scheme Under section 44AD, need to maintain books of account as prescribed under section 44AA of the Income Tax Act, 1961

Yes, a taxpayer adopting the presumptive taxation scheme under section 44AD of the Income Tax Act, 1961 is required to maintain books of account as prescribed under section 44AA. The books of account to be maintained include:

1. Cash book
2. Journal, if the accounts are maintained on mercantile basis
3. Ledger
4. Carbon copies of bills, where bills exceeding Rs. 25 are issued
5. Original bills for expenses exceeding Rs. 50
6. Proof of deduction of tax at source, where applicable

While the presumptive taxation scheme allows eligible taxpayers to compute their taxable business income at a prescribed rate without maintaining detailed books of accounts, they are still required to maintain certain basic books of accounts to substantiate their income and expenses. These books of accounts must be preserved for a period of six years from the end of the relevant assessment year.

10. What are the Income Tax provisions for Payment of advance tax in respect of income from business covered under section 44AD.

In case of a taxpayer who is eligible and has opted for the presumptive taxation scheme under section 44AD, the advance tax liability is calculated based on the presumptive income declared.

The taxpayer is required to pay advance tax in four installments as follows:

1. By 15th June – 15% of the presumptive income declared for the year
2. By 15th September – 45% of the presumptive income declared for the year (less advance tax paid in the first installment)
3. By 15th December – 75% of the presumptive income declared for the year (less advance tax paid in the first and second installments)
4. By 15th March – 100% of the presumptive income declared for the year (less advance tax paid in the first three installments)

It is important to note that if the advance tax paid by the taxpayer is less than 90% of the tax liability on the total income declared (including income other than business income), interest under section 234B and 234C may be levied.

Therefore, even though the taxpayer under section 44AD is not required to maintain books of account for calculating income, they still have to estimate their income and pay advance tax accordingly to avoid interest and penalties.

11. What are the Consequences and conditions if a person opts out from the presumptive taxation scheme of section 44AD 

A person who has opted for the presumptive taxation scheme of section 44AD can opt out of it and file their tax return by computing their taxable income as per the regular provisions of the Income Tax Act.

However, there are certain conditions and consequences associated with opting out from the presumptive taxation scheme:

1. Maintenance of Books of Account: The taxpayer who opts out of the presumptive taxation scheme will be required to maintain books of account as prescribed under section 44AA of the Income Tax Act, and get them audited if the turnover exceeds the specified limit.
2. Minimum period of five years: A taxpayer who opts out of the presumptive taxation scheme of section 44AD cannot again opt for it for the next 5 consecutive assessment years.
3. Payment of Advance Tax: The taxpayer who opts out of the presumptive taxation scheme may have to pay advance tax based on their estimated income.
4. Tax Liability: The taxpayer who opts out of the presumptive taxation scheme may have a higher tax liability as compared to the tax liability computed under the presumptive taxation scheme.

Therefore, before opting out of the presumptive taxation scheme, the taxpayer should carefully evaluate the advantages and disadvantages of doing so, and consult a tax expert if required.

12. For whom the presumptive taxation scheme of section 44ADA is designed?

The presumptive taxation scheme of section 44ADA is designed for professionals, such as doctors, lawyers, architects, interior decorators, and other specified professionals whose total gross receipts do not exceed Rs. 50 lakhs in a financial year. This scheme is intended to simplify the income tax filing process for small professionals and to provide them with a convenient way to calculate their taxable income. Under this scheme, the taxable income is presumed to be 50% of the gross receipts, and the professional is not required to maintain detailed books of accounts. However, if a professional wishes to declare a lower income, he or she may do so but must maintain proper books of account and get them audited by a chartered accountant.

13. Who are the Eligible persons who can take advantage of the presumptive taxation scheme of section 44ADA

The eligible persons who can take advantage of the presumptive taxation scheme of section 44ADA are professionals who are engaged in specified professions as mentioned in section 44AA(1) of the Income Tax Act, 1961. These professions include legal, medical, engineering, architectural, accountancy, technical consultancy, interior decoration, and other similar professions.

To avail of the presumptive taxation scheme under section 44ADA, the gross receipts of the assessee from the profession should not exceed Rs. 50 lakhs in a financial year. The scheme is not available to a person who has opted for the presumptive taxation scheme of section 44AD for their business income. Additionally, professionals who have income from any source other than the specified profession cannot opt for this scheme.

14. What is the Manner of computation of taxable income in case of a person adopting the presumptive taxation scheme of section 44ADA?

In case an individual is eligible to adopt the presumptive taxation scheme of section 44ADA, their taxable income is deemed to be 50% of their gross receipts from the specified profession in the relevant financial year.

For example, if an individual’s gross receipts from their profession are Rs. 40 lakhs in a financial year, their taxable income under the scheme would be Rs. 20 lakhs (i.e., 50% of Rs. 40 lakhs).

It’s important to note that no further deductions or expenses can be claimed against this income, as the taxable income is deemed to be 50% of the gross receipts.

15. The presumptive income computed @ 50% is the final income and no further expenses will be allowed – Is it correct?

Presumptive income computed at 50% is a method used by tax authorities in some countries to estimate the income of certain taxpayers, such as small business owners, based on a percentage of their gross receipts or sales.

In general, presumptive income is considered an estimation of the taxpayer’s income, and the taxpayer may still be allowed to deduct certain expenses to arrive at their taxable income. However, the specific rules and regulations regarding what expenses can be deducted may vary depending on the country and the specific circumstances of the taxpayer.

Therefore, it is not correct to assume that no further expenses will be allowed after the presumptive income is computed at 50%. The taxpayer may still be eligible to deduct some expenses from their income to arrive at their taxable income, subject to the applicable tax laws and regulations.

16. What are the Income Tax Provisions for Payment of advance tax in respect of income from professions covered under section 44ADA?

Section 44ADA of the Income Tax Act, 1961 provides for a presumptive taxation scheme for certain professionals such as doctors, lawyers, architects, engineers, and accountants, among others. Under this scheme, professionals can declare their income at a prescribed percentage of their gross receipts, and pay taxes on that basis, without the need for detailed bookkeeping or accounting.

In respect of payment of advance tax, the following provisions apply for professionals covered under section 44ADA:

1. Payment of advance tax is mandatory if the tax liability for the financial year is Rs. 10,000 or more.

The due dates for payment of advance tax for professionals under section 44ADA are as follows:
a. On or before 15th June – 15% of the total tax liability

b. On or before 15th September – 45% of the total tax liability, less the amount paid in the first installment

c. On or before 15th December – 75% of the total tax liability, less the amounts paid in the first and second installments

2. d. On or before 15th March – 100% of the total tax liability, less the amounts paid in the first three installments
3. If the advance tax paid by the professional is less than 90% of the assessed tax, interest will be charged under section 234B and section 234C of the Income Tax Act.
4. If the professional’s total income for the financial year exceeds the presumptive income declared under section 44ADA, the professional will have to file a regular tax return and pay taxes on the actual income earned.

It is important for professionals to comply with the advance tax provisions and pay taxes on time to avoid any penalties or interest charges.

17. What is the Income Tax Provisions for Maintenance of books of account if a person opts for presumptive taxation scheme of section 44ADA

If a person opts for the presumptive taxation scheme under section 44ADA, they are not required to maintain regular books of accounts, as the scheme is designed to simplify the tax compliance for professionals.

However, it is important to note that even if a person opts for the presumptive taxation scheme, they are still required to maintain records of gross receipts, which includes invoices, bills, and other documents related to their profession. These records may be required to be produced before the tax authorities during any assessment proceedings.

Additionally, if the person’s total income exceeds the presumptive income limit prescribed under section 44ADA, they will have to file a regular tax return and maintain proper books of accounts in accordance with the tax laws.

In summary, while a person opting for the presumptive taxation scheme under section 44ADA is not required to maintain regular books of accounts, they still need to maintain records of their gross receipts and other relevant documents to support their income computation and compliance with tax laws.

18. What are the Provisions to be applied if a person does not opt for the presumptive taxation scheme of section 44ADA and declares his income from profession at lower rate (i.e. less than 50%)?

If a person engaged in a profession does not opt for the presumptive taxation scheme under section 44ADA and declares their income from profession at a lower rate, the following provisions will be applicable:

1. Maintenance of books of accounts: The person will be required to maintain regular books of accounts, as per the tax laws, to record all income, expenses, receipts, and payments related to their profession. This includes maintaining books of accounts like cash book, ledger, and other financial records.
2. Tax audit: If the person’s gross receipts exceed Rs. 50 lakhs in a financial year, they will be required to get their accounts audited by a chartered accountant as per the tax laws. The audit report will need to be filed with the income tax return.
3. Deductions: The person will be allowed to claim deductions for business expenses incurred for earning the income, subject to the conditions and limits specified under the tax laws.
4. Advance tax: The person will be required to pay advance tax on the estimated income, as per the due dates and provisions specified under the tax laws.
5. Penalty for non-maintenance of books of accounts: If the person does not maintain proper books of accounts or fails to get their accounts audited, they may be liable to pay a penalty as specified under the tax laws.

In summary, if a person engaged in a profession declares their income at a lower rate than 50% and does not opt for the presumptive taxation scheme under section 44ADA, they will need to maintain regular books of accounts, get their accounts audited if applicable, pay advance tax, and comply with other tax provisions and regulations.

19. What is the Income Tax Provisions for Applicability of the presumptive taxation scheme of section 44AE?

Section 44AE of the Income Tax Act, 1961 provides for a presumptive taxation scheme for taxpayers engaged in the business of plying, hiring or leasing goods carriage(s). Under this scheme, taxpayers can declare their income at a prescribed rate per month or part thereof, for each goods carriage, instead of maintaining detailed accounts and records.

The provisions related to the applicability of the presumptive taxation scheme under section 44AE are as follows:

1. Eligible taxpayers: The presumptive taxation scheme of section 44AE is applicable to taxpayers who are engaged in the business of plying, hiring or leasing goods carriage(s). It applies to both individuals and Hindu Undivided Families (HUFs).
2. Eligible vehicles: The scheme applies to all types of goods carriages, whether owned or hired, with a gross vehicle weight of up to 12,000 kg. It does not apply to passenger vehicles or vehicles used for purposes other than the transportation of goods.
3. Presumptive income: The presumptive income for each goods carriage is fixed at Rs. 7,500 per month or part thereof, for each vehicle.
4. Maintenance of books of accounts: Taxpayers opting for the presumptive taxation scheme under section 44AE are not required to maintain regular books of accounts. However, they need to maintain documents like logbooks, trip sheets, freight receipts, and other documents related to the business.
5. Advance tax: Taxpayers opting for the presumptive taxation scheme under section 44AE are required to pay advance tax on or before the due dates specified under the tax laws.
6. Non-applicability: The presumptive taxation scheme under section 44AE is not applicable if the taxpayer owns more than 10 goods carriages at any time during the financial year, or if the taxpayer has claimed deductions under section 10AA (Special provisions for new units in North Eastern States) or section 35AD (Investment in eligible business).

In summary, taxpayers engaged in the business of plying, hiring or leasing goods carriage(s) can opt for the presumptive taxation scheme under section 44AE, subject to certain conditions and limitations. They need to maintain certain documents, pay advance tax, and comply with other tax provisions and regulations.

20. Who are Eligible taxpayer and eligible business for the purpose of the presumptive taxation scheme of section 44AE?

The presumptive taxation scheme under section 44AE of the Income Tax Act, 1961 is applicable to taxpayers engaged in the business of plying, hiring or leasing of goods carriages. The eligibility criteria for taxpayers and the business are as follows:

1. Eligible taxpayer: The scheme is applicable to all individuals, Hindu Undivided Families (HUFs), and partnership firms who are engaged in the business of plying, hiring or leasing of goods carriages.
2. Eligible business: The scheme is applicable to the business of plying, hiring, or leasing goods carriages of any type. This includes vehicles like trucks, lorries, tempos, and other vehicles that are used for the transportation of goods.
3. Limitations: The scheme is applicable only if the gross vehicle weight of the goods carriage(s) does not exceed 12,000 kilograms. It is also applicable only if the taxpayer owns less than 10 goods carriages at any time during the financial year.

Under this scheme, eligible taxpayers can declare their income at a prescribed rate per month or part thereof, for each goods carriage, instead of maintaining detailed accounts and records. The presumptive income for each goods carriage is fixed at Rs. 7,500 per month or part thereof, for each vehicle.

In summary, the presumptive taxation scheme under section 44AE is applicable to individual taxpayers, HUFs, and partnership firms engaged in the business of plying, hiring or leasing goods carriages, subject to certain limitations and conditions.

21. A person who owns more than 10 goods vehicles cannot adopt the presumptive taxation scheme of section 44AE – Is it Correct?

No, that statement is not entirely correct. As per section 44AE of the Income Tax Act, 1961, the presumptive taxation scheme is applicable to taxpayers engaged in the business of plying, hiring or leasing of goods carriages, subject to certain conditions and limitations. One such condition is that the taxpayer should not own more than 10 goods carriages at any time during the financial year.

In other words, a person who owns more than 10 goods carriages is not eligible to adopt the presumptive taxation scheme under section 44AE. They are required to maintain regular books of accounts and declare their actual income from the business. However, they can still claim the deduction for expenses incurred in running the business, subject to compliance with the relevant tax laws and regulations.

Therefore, the presumptive taxation scheme of section 44AE is not available for taxpayers who own more than 10 goods carriages.

22. What are the Income Tax Provisions for Payment of advance tax in respect of income from professions covered under section 44AE?

It is important to note that the presumptive taxation scheme under section 44AE of the Income Tax Act, 1961 is applicable only to taxpayers engaged in the business of plying, hiring, or leasing goods carriages. Therefore, the provisions for payment of advance tax in respect of income from professions covered under section 44AE are not applicable.

However, if a taxpayer is engaged in both the business of plying, hiring, or leasing goods carriages as well as a profession covered under a different presumptive taxation scheme, such as section 44ADA, they would need to comply with the provisions for payment of advance tax in respect of income from the profession covered under section 44ADA.

Under section 44ADA, eligible taxpayers are required to pay advance tax in four installments during the financial year, based on the estimated income from the profession. The due dates for payment of advance tax are June 15th, September 15th, December 15th, and March 15th of the financial year.

If a taxpayer fails to pay the required advance tax installments, they may be liable to pay interest under section 234B and 234C of the Income Tax Act, 1961. Therefore, it is important for taxpayers to estimate their income accurately and pay the advance tax installments on time to avoid any interest or penalty.

The Author is a Practicing Chartered Accountant in Dwarka New Delhi.