Presumptive Tax Scheme

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Presumptive Tax Scheme rates under Section 44 of the Income Tax Act

The presumptive tax scheme provides the estimation of income tax on an approximated income or profit. Managing books of accounts and receiving audited from a Chartered Accountant is a costly operation for small merchants and business people. That’s why the Income Tax department has formulated the presumptive tax system to help these small merchants, people in business, and service providers to pay tax on an approximated income rather than total revenue.

  Small Businessmen Professionals Transporters
Applicable Income Tax Section Section 44AD Section 44ADA Section 44AE
Eligible business Entities in any business excluding :
  • The business of plying, hiring, or leasing goods carriages
  • Agency business
  • With income as commission or brokerage
Professionals offering:
  • Legal services
  • Technical consultancy
  • Interior decoration
  • Engineering and architectural
  • Medical
  • Any other profession specified by CBDT
Entities in the business of:
  • Hiring, plying or leasing of goods carriages
Eligibility criteria, Maximum Turnover Limit Turnover up to ₹ 2 Cr in a year Annual receipts of not more than ₹ 50 Lakh in a year Owning not more than 10 goods vehicles during the year
Presumptive computation of taxable income 8% of total receipts provided that non-cash and electronic receipts shall be charged at 6% of gross turnover during the year. A higher-income can be declared 50% of gross receipts. A higher-income of more than 50% can be declared ₹ 7,500 per vehicle per month or part thereof based on the duration for which the person owned the vehicle during the year
Tax Rate At marginal tax rate slabs At marginal tax rate slabs At marginal tax rate slabs
Deductions or allowances No further deductions and exemptions allowed No further deductions and allowances allowed. No further deductions and allowances allowed.
Exception: Partnership firm can claim a deduction for and interest to the partners from the income computed at ₹ 7,500 per vehicle per month
Advance tax liability To be deposited in one instalment on or before 15th March of the previous year. To be deposited in one instalment on or before 15th March of the previous year. To be deposited in one instalment on or before 15th March of the previous year.

Under Section 44 of the IT Act, anybody involved in business or profession must manage a book of accounts for every fiscal year and get them audited by certified accountants. Managing a book of accounts and getting them audited gets tiring and complex for small taxpayers.

Presumptive Tax scheme

The IT Department has formed a scheme named “Presumptive Tax Scheme” under section 44AD, 44ADA and 44AE of the IT Act, which spares the small taxpayers from keeping the accounts’ annual book.

Under the presumptive tax scheme, business or professional gains are presumed/estimated a specified per cent of the entity’s annual turnover and taxed proportionately. The calculation of revenue under the presumptive taxation scheme is different under sections 44AD, 44ADA and Section 44AE of the IT act.

The benefit of opting under the Presumptive Taxation Scheme

  • Exception from managing books of accounts
  • Clarifies the process of the IT agreement
  • No need to appoint accountants to audit book of accounts

Presumptive tax is applicable under the three sections of the Income Tax Act.

The presumptive taxation scheme (PTS) of section 44AD is relevant:

  •  In the event of a business.
  • In the case of the profession.
  • In the event of business of plying, renting or leasing of goods coach.

Entities that are eligible for the Presumptive Tax Scheme

  • Resident individual
  • Resident HUF
  • Resident business firm excluding the partnership firm with restrained indebtedness.

Entities that are not eligible for the Presumptive Tax Scheme

  • Non-resident individuals
  • Limited liability business firm
  • Companies

Outcomes if an individual opts out of presumptive tax scheme (PTS) under section 44AD

When an individual opts of the presumptive tax scheme (PTS) under section 44AD, he/she must obey the same plan for the next 5 years. If he/she misses doing so, he will not be able to avail of the presumptive tax scheme for the coming 5 years beginning from the assessment year in which he decided to opt out of the scheme.

Deductions under presumptive tax scheme

An individual choosing a presumptive taxation scheme is believed to have claimed all the reduction of investment, and consequently, no further deductions on account of expenses are permitted. However, the mentioned value of any asset handled will be computed as if the depreciation has been petitioned under section 32 of the IT Act and has been actually acknowledged.

Visit the Dialabank website to know more about the various benefits of the Presumptive Tax Scheme of the IT Act.

FAQs about the Presumptive Tax Scheme (PTS)

What is meant by presumptive income?

The presumptive income is the estimated income or profit based on which the tax would be calculated for the eligible businesses under the applicable sections of 44AD, 44ADA, and 44AE.

How is presumptive tax calculated?

The applicable slab rate is applied to the presumptive or estimated income to calculate presumptive tax.

How do I file a presumptive tax return? Presumptive Tax Scheme

The presumptive tax return is filed through the Sugam ITR-4S Form, under section 44AD, 44ADA, and 44AE.

Who is eligible for 44ad?

Under Section 44AD (including 44ADA), all businesses except the business of plying, renting, and leasing goods carriage, with total turnover or gross receipts up to ₹ 2 Crore, are qualified.

What is presumptive income from Business & Profession?

The estimated income of business or profession as per the applicable Income Tax provisions under Section 44AD, 44ADA, and 44AE to calculate income tax is the presumptive income from business and profession.

What is Section 44AD of the Income Tax Act?

Income Tax Law introduced section 44AD to ease maintaining accounts and getting them audited by a C.A for small businesses. The eligible businesses under Section 44AD are not required to make the books of accounts or get them audited formally.

Is 44AD compulsory?

No, Section 44AD is not compulsory. An assessee can opt for computation of income through the regular course, provided the books of accounts are maintained and audited.