Presumptive taxation

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A person engaged in business or profession 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, sections 44AE., Section 44BB and Section 44BBB

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.

This article aims to highlight the provisions relating to such presumptive taxation

Section 44AD

Presumptive taxation

Who is eligible to take the advantage of presumptive taxation under section 44AD?

the presumptive taxation scheme of section 44AD is designed to give relief to small taxpayers engaged in any business (except the business of plying, hiring or leasing of goods carriages referred to in section 44AE).

The presumptive taxation scheme of section 44AD can be adopted by following persons :
  • Resident Individual
  • Resident Hindu Undivided Family
  • 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).

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.

Who are the persons not eligible to take the advantage of presumptive taxation?

  • Assesse claiming deduction under section 10AA and section 80-IA to 80RRB
  • Assesse engaged in business of plying, hiring or leasing goods carriages
  • A person engaged in a profession as prescribed under section 44AA(1) cannot adopt the presumptive taxation scheme of section 44AD
  • A person earning income in the nature of commission or brokerage
  • A person carrying on any agency business
  • An insurance agent cannot adopt the presumptive taxation scheme of section 44AD
  • A person whose total turnover or gross receipts for the year exceed Rs. 2,00,00,000 cannot adopt the presumptive taxation scheme of section 44AD

What is the manner of computing taxable business income in presumptive taxation?

  • Income shall be computed @ 8% of the turnover or gross receipts of the eligible business for the year.
  • 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 or through such other electronic mode as may be prescribed.
    However, a person may voluntarily disclose his business income at more than 8% or 6%, as the case may be, of turnover or gross receipt.

The presumptive income computed as per the prescribed rate is the final income and no further expenses will be allowed or disallowed

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


In case of a person who is opting for the presumptive taxation scheme of section 44AD, the provisions of allowance/disallowances as provided for under the Income-tax Act will not apply and income computed at the presumptive rate of 6% or 8% will be the final taxable income of the business covered under the presumptive taxation scheme. In other words, the income computed as per the prescribed rate will be the final taxable income of the business covered under the presumptive taxation scheme and no further expenses will be allowed or disallowed.


While computing income as per the provisions of section 44AD, separate deduction on account of depreciation is not available. However, the written down value of any asset used in such business shall be calculated as if depreciation as per section 32 is claimed and has been actually allowed.

No need to maintain books of account as prescribed under section 44AA

Section 44AA deals with provisions relating to maintenance of books of account by a person engaged in business/profession. Thus, a person engaged in business/profession has to maintain books of account of his business/profession according to the provisions of section 44AA.


In case of a person engaged in a business and opting for the presumptive taxation scheme of section 44AD, the provisions of section 44AA relating to maintenance of books of account will not apply. In other words, if a person adopts the provisions of section 44AD and declares income @ 6% or 8% (as the case may be) of the turnover, then he is not required to maintain the books of account as provided for under section 44AA in respect of business covered under the presumptive taxation scheme of section 44AD.

What are the provisions relating to opting in and out of the presumptive taxation scheme under section 44AD?

  • If the person declares income for the previous year as per section 44AD, then he is bound to declare the income of next five previous years as per section 44AD.
  • If he does not declare the income as per section 44AD in the next five previous years, the he is not eligible to claim the benefit of section 44AD in the five years next following the previous year in which he did not declare income as per section 44AD
  • He is required to get the tax audit done and maintain books of accounts for the above previous years in which he is not governed by section 44AD (provided income exceed taxable limit)

Other provisions related to Presumptive taxation scheme under section 44AD

  • All deductions are deemed to have been allowed under section 30 to 38
  • Depreciation shall be deemed to have been allowed
  • In case of firm, the salary and interest to the partners are deemed to have been allowed
  • Provisions of advance tax shall apply to the assesse even if he opts for the scheme of presumptive taxation under section 44AD
  • The person option for presumptive taxation under section 44AD are not required to get the accounts audited
  • The person option for presumptive taxation under section 44AD are not required to maintain the books of accounts
  • Deductions under section CHAPTER VI-A can still be claimed even if the person ops for section 44AD
  • Current year and brought forward losses can be set off against the presumptive income under section 44AD.

Section 44ADA

Section 44ADA is a special provision for calculating the profits and gains of small professionals in certain circumstances.

  • Assesse who are eligible to compute the income under section 44ADA
    The following Indian assesses are eligible:
    Individuals
    Hindu undivided families (HUFs)
    Partnership firms (note that limited liability partnerships are not eligible)
  • Eligible professionals under Section 44ADA
    Professionals engaged in the following professions are eligible:
    Interior decorations
    • Technical consulting
    • Engineering
    • Accounting
    • Legal
    • Medical
    • Architecture
    • Other professionals, as mentioned below:
      a. Movie artists includes a producer, editor, actor, director, music director, art director, dance director, cameraman, singer, lyricist, story writer, screenplay or dialogue writer and costume designers
      b. Authorised representative means a person who represents another person for a fee before a tribunal or any authority constituted under any law. It does not include an employee of the person so represented or a person who is carrying on the profession of accountancy
      c. Any other notified professionals
  • Limit for eligibility under section 44ADA
    Assesse should be engaged in a profession in which the gross receipt do not exceed Rs 50 lakh
    • 50% of the total gross receipts will be deemed as income under the head profits and gains of business and profession when computation under presumptive taxation is made under section 44ADA or income offered by assessee from profession whichever is higher.
    • Benefits that the assesse get by computing the income under this section
    • No maintenance of books of accounts. However the assesse  must maintain books and get accounts if the Total income of the assessee is more than the basic exemption and Income from the profession is offered at a lower rate than 50% of the gross receipts
    • No requirement of getting the tax audit done.
    • All deductions shall deemed to have been allowed
    • The written down value (WDV) of assets for tax purpose shall be calculated as of the depreciation has been allowed each year.
      Assesse should be engaged in a profession in which the gross receipt do not exceed Rs 50 lakh
    • 50% of the total gross receipts will be deemed as income under the head profits and gains of business and profession when computation under presumptive taxation is made under section 44ADA or income offered by assessee from profession whichever is higher.
    • Benefits that the assesse get by computing the income under this section
    • No maintenance of books of accounts. However the assesse  must maintain books and get accounts if the Total income of the assessee is more than the basic exemption and Income from the profession is offered at a lower rate than 50% of the gross receipts
    • No requirement of getting the tax audit done.
    • All deductions shall deemed to have been allowed
    • The written down value (WDV) of assets for tax purpose shall be calculated as of the depreciation has been allowed each year.

Section 44AE

This section states that if an assessee is carrying business of plying, hiring or leasing of goods carriages then the income of such business chargeable to tax under the head “Profits and gains of business or profession” shall be deemed to be the aggregate of the profits and gains, from all the goods carriages owned by him in the previous year, computed in accordance with the following provisions/parts


The important criteria in this scheme is the restriction of owning more than 10 goods vehicles at any time during the previous year. Thus, if an assessee is owning more than 10 goods vehicles during the year, then such an assessee cannot adopt this scheme.


Further, this scheme can be adopted only by the assessees who are engaged in the business of plying, hiring or leasing goods carriages. Thus, an assessee engaged in the business of passenger transport cannot adopt these provisions.

  • If assesse owns a “heavy good vehicle”*: The profit shall be an amount equal to Rs. 1000 per ton of gross vehicle weight or unladen weight, as the case may be, for every month or part of a month during which the heavy goods vehicle is owned by the assesse in the previous year or an amount claimed to have been actually earned from such vehicle,whichever is higher.

If assesse owns a “light  good vehicle”: The profit shall be an amount equal to Rs. 7500 for every month or part of a month during which the heavy goods vehicle is owned by the assesse in the previous year an amount claimed to have been actually earned from such vehicle,

whichever is higher.

Note 1 : If the actual income is higher than the presumptive rate, i.e., higher than Rs. 1 ,000/Rs. 7,500, then such higher income can be declared.

Takeaway:

Presumptive taxation is a scheme for small taxpayers. To opt under the scheme various provisions are required to be understood. Special advice from professionals at the legal window can be taken.

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