What is meaning of presumptive taxation scheme

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

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A person adopting the presumptive taxation scheme can declare income at a prescribed rate and, in turn, is relieved from tedious job of maintenance of books of account.

1) Resident Individual

2) Resident Hindu Undivided Family

3) Resident Partnership Firm (not Limited Liability Partnership Firm)

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

Further, this Scheme 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 of section 44AD?

The scheme of   section 44AD is designed to give relief to small taxpayers engaged in any business, except the following businesses:
Business of plying, hiring or leasing goods carriages referred to in sections 44AE.

  • A person who is carrying on any agency business.
  • A person who is earning income in the nature of commission or brokerage
  • Any business whose total turnover or gross receipts exceeds two crore rupees.​
  • Apart from above discussed businesses, a person carrying on profession as referred to in section 44AA (1) is not eligible for presumptive taxation scheme under section 44AD.

​​​​​​​​​A person who is engaged in any profession as prescribed under section 44AA(1)​ cannot adopt the presumptive taxation scheme of section 44AD.​

However, he can opt for presumptive taxation scheme under section 44ADA​ and declare 50% of gross receipts of profession as his presumptive income. Presumptive Scheme under section 44ADA​​ is applicable only for resident assesse whose total gross receipts of profession do not exceed fifty lakh rupees.

Can a person whose total turnover or gross receipts for the year exceed Rs. 2,00,00,000 adopt the presumptive taxation scheme of section 44AD?

Income shall be calculated at rate of 6% in respect of total turnover or gross receipts which is received by an account payee cheque or draft or use of electronic clearing system.

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If a person adopts the presumptive taxation scheme of section 44AD, then is he required to maintain books of account as per section 44AA?

if a person adopts the provisions of section 44AD and declares income @ 8%/6% of the turnover, then he is not required to maintain the books of account as provided under section 44AA in respect of business covered under the presumptive taxation scheme of section 44AD​.

What provisions will apply if a person who is eligible for the presumptive taxation scheme of section 44AD declares his income at a lower rate (i.e. less than 8%)?

A person can declare income at lower rate (i.e., less than 8%/6%), however, if he does so, and his income exceeds the maximum amount which is not chargeable to tax, then he is required to maintain the books of account as per the provisions of section 44AA and has to get his accounts audited as per section 44AB.​

If a person adopts the presumptive taxation scheme but he opts out from the scheme in any of the subsequent five years, then what are the consequences?

​​​​​If a person opts for presumptive taxation scheme then he is also require to follow the same scheme for next 5 years. If he failed to do so, then presumptive taxation scheme will not be available for him for next 5 years

Who is eligible to take advantage of the presumptive taxation scheme of section 44ADA?

The presumptive taxation scheme of sections 44ADA can be adopted by a person resident in India, carrying on specified profession whose gross receipts do not exceed fifty lakh rupees in a financial year. Following professions are specified profession:

  • Legal​
  • Medical
  • Engineering or architectural
  • Accountancy
  • Technical consultancy
  • Interior decoration
  • Any other profession as notified by CBDT
What is the manner of computation of taxable income in case of a person adopting the presumptive taxation scheme of section 44ADA?

​​​​​In case of a person adopting the provisions of sections 44ADA, income will be computed on presumptive basis, i.e. @ 50% of the total gross receipts of the profession. However such person can declare income higher than 50%.

Can a person who adopts the presumptive taxation scheme of section 44ADA claim any further deduction of expenses after declaring profit @ 50% of gross receipts?

​​​No, a person who adopts the presumptive taxation scheme is deemed to have claimed all deduction of expenses. Any further claim of deduction is not allowed after declaring profit @ 50%.

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