In order to give relief, the Government has introduced presumptive income tax schemes for small businessmen and professionals.
As per this scheme, taxpayers are not required to maintain books of accounts. Instead, a percentage of the taxpayer’s total turnover or gross receipts will be considered as income for the financial year.
However, you need to have records for followings to file your return under presumptive income tax scheme;
- Turnover
- Debtors
- Inventory
- Cash and Bank account
- Creditors
We have three different sections in the Income tax Act to file your return under presumptive taxation scheme. Under these three sections, income is calculated on a presumptive basis provided the turnover and gross receipt is below the specified limit and the assessee satisfy all the terms and conditions of the scheme.
Section 44AD- Presumptive taxation scheme for businesses
Section 44AD is applicable to resident individuals, Hindu Undivided Families (HUF) and partnership firms (excluding limited liability partnerships or LLPs) engaged in any business having a turnover or gross receipts of not more than Rs 2 crores in the respective financial year.
If you adopt section 44AD, then your income will be computed on presumptive basis at the rate of 8% of the turnover or gross receipt of the business for the year.
Instead of 8%, you can compute your income at the rate of 6% if your turnover or gross receipt is received by an account payee cheque or an account payee bank draft or use of electronic clearing system through a bank account or through such other electronic mode.
However section 44AD benefits can not be availed by a taxpayer in following cases;
- Any business of plying, hiring or leasing of goods carriages referred to in section 44AE,
- Any Person carrying on an agency business,
- Any Person earning income in the nature of Commission or Brokerage.
- A person who is engaged in any profession as prescribed under section 44AA(1)
Section 44ADA- Presumptive income tax scheme for Professionals
Section 44ADA is applicable to an individual or partnership firm (other than LLP) undertaking any profession (such as legal, accounting, medical, architect, and so on) as listed in section 44AA of the Act and having receipts less than Rs 50 lakhs can opt for the scheme.
If you adopt section 44ADA, then your income will be computed on presumptive basis at the rate of 50% of the total gross receipts of the profession.
Section 44AE- Presumptive taxation scheme for goods carriages
Section 44AE is applicable to those who are engaged in the business of plying, leasing or hiring of goods carriages (not more than 10 goods vehicles at any time during the year).
If you own more than 10 goods vehicles at any time during the financial year, then section 44AE is not applicable. You need to calculate your tax liability based on normal provisions of income tax act, 1961.
Based on the type of goods carriage, you need to calculate your tax liability for the year.
For a goods carriage having gross vehicle weight exceeding 12,000 kilograms (heavy Goods Vehicle), income will be computed @ Rs. 1,000 per ton of gross vehicle weight for every month or part of a month during which the heavy goods vehicle is owned by the taxpayer.
In any other case (i.e. vehicles other than heavy goods vehicles), income will be computed at the rate of Rs. 7,500 for every month or part of a month during which the goods carriage is owned by the taxpayer.
Part of the month would be considered a full month.
If the actual income is higher than the presumptive rate then such higher income can be declared by the taxpayer.
6%, 8% and 50% of the turnover or gross receipt are the minimum. If the businessman and professional wants, then they can voluntarily disclose higher income at more than the stipulated percentage mentioned under section 44AD and 44ADA.
By disclosing higher income does not mean that you will not be getting other benefits of presumptive taxation schemes. You can still file your tax return with higher income under the presumptive income tax scheme.
Here are two major benefits of presumptive taxation scheme;
- not required to maintain exhaustive books of accounts
- pay the whole amount of advance tax in one installment, on or before March 15 instead of paying in four installments throughout the year.
If you are opting for a presumptive taxation scheme, then you need to make sure that you select the right income tax form based on your source of income and other provisions applicable. We have ITR-3 and ITR-4 applicable to taxpayers opting for presumptive taxation schemes.
When books of account and audit is a must
The taxpayer can declare a lower rate than the rate mentioned in Section 44AD/44ADA/44AE.
However, if he has opted to declare a income which is lower than the income as calculated under section 44AD/44ADA/44AE 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 by a chartered accountant in practice as per section 44AB, in general its referred to as tax audit.
For instance, under section 44AD you can declare 8% or more (assuming you have cash transactions for the year) on your turnover as your income from business. If you have declared lower income, then your books of account should be audited by a chartered accountant in practice. Both tax audit report and other forms are required to be filed along with the income tax return for the financial year.
Can you claim other expenses if opted for section 44AD/44ADA/44AE
If you have opted for the presumptive taxation scheme, the provisions of allowance and dis-allowance as provided in the income tax act, 1961, will not be allowed. It will be assumed that depreciation and all other expenses for the business has been claimed by the assessee.
Presumptive income as calculated under section 44AD/44ADA/44AE will be directly considered as the assessee’s taxable income of the business considered for presumptive taxation scheme and no further expenses in this regard will be allowed or disallowed.
However, assessee can take benefits of tax deduction as applicable under chapter VI-A while computing income. In chapter VI-A, you have all the tax deductions applicable to an individual such as section 80C, 80D, 80DD and up to 80U. You can take advantage of these sections if you satisfy the terms and conditions.
