Demystifying Income Tax Presumptive Taxation Scheme

What is Presumptive Taxation?

Presumptive taxation is a simplified version of calculating and paying taxes which has been specially designed to provide respite to individuals with low income from the burdensome task of bookkeeping and auditing. The Income Tax Act has established the Presumptive Taxation Scheme within the framework of sections 44AD, 44ADA, and 44AE of the Income Tax Act, 1961. Under this scheme, taxpayers can declare their income at a predetermined rate instead, eliminating the need for maintaining account books and undergoing cumbersome audits.

Who is eligible for Presumptive Taxation u/s 44AD?

As per Section 44 AD of the Income Tax Act 1961, this scheme can be adopted by the following persons:

Resident Individual
Resident HUF
Resident Partnership Firm (not LLP)
The eligible taxpayer must be engaged in any business activity, except for the business of plying, hiring, or leasing goods carriages mentioned in section 44AE, and their total turnover or gross receipts in the preceding year should not surpass a sum of two crore rupees.

Who are not eligible under for Presumptive Taxation Scheme of Section 44AD?

Non-residents;
Any person who has made any claims towards deductions under section 10A, 10AA, 10B, 10BA or 80 HH or 80 RRB of Chapter VIA in the relevant year;
Agency business
professions referred in 44AA(1)
Insurance Agents or other commission or brokerage agents.
Companies & LLPs.

Who is eligible to avail the advantage of Presumptive Taxation under section 44ADA?

This scheme has been designed to provide relief to the taxpayers (persons resident in India) engaged in the following professions:

Legal
Medical
Engineering
Architecture
Accountancy
Technical consultancy
Interior Decoration or
Other professions notified by CBDT.

However, this scheme can only be adopted by the assessee (Individual/ Partnership Firm) if the gross total receipts from the profession does not exceed Rs. 50 Lakhs (As per Budget 2023, this limit has been revised and increased from 50 lakhs to 75 lakhs if 95% of the total receipts are via online channels).

What are the numerous benefits to choose Presumptive Taxation Scheme?

(i) No mandatory maintenance of accounts and no mandatory tax audit u/s 44AA or 44AB (except certain circumstances).

(ii) No obligation to pay various instalment of advance tax during the year, only single payment of the entire amount of advance tax has to be paid on or before 15th March of the preceding year.

(iii) Simpler ITR form than a normal business or professional income ITR. [Form ITR-4 (Sugam)].

(iv) This scheme reduces compliance burden for assessess and promotes ease of business.

Are their any negative consequences when assessee chooses to opt out of 44AD?

Once an individual chooses to participate in a presumptive taxation scheme, they must adhere to the same scheme for the subsequent five years. Failure to comply will result in the ineligibility to avail of the presumptive taxation scheme for the following five years.

Furthermore, if the individual opts out of the presumptive taxation scheme and their total income exceeds the minimum taxable limit, they will be obligated to maintain accounting records and undergo an Income Tax audit starting from the Assessment Year in which they opt out.

Is the income % fixed under presumptive tax scheme or can the assessee declare a higher or lower income?

a. Of course, declaration of income at a higher rate than prescribed under 44AD, 44ADA & 44E is possible. There are no special compliances that have to be taken care of.

b. However, in case a person wants to declare lower rate income than prescribed then he is mandated to maintain proper books of accounts and comply with tax audit provisions.

It’s important to understand that the benefits and advantages of the scheme can vary considering individual circumstances. It’s advised to consult with tax professionals who are well versed with the provisions for accurate and updated information. We at Master Brains have an empaneled team of experts, who can assist in the preparation of financial statements, finalization of accounts and provide income tax consultancy. We can also help you find the right Tax Professional as per your requirements and budget.

FAQs on Demystifying Income Tax Presumptive Taxation Scheme

What is the main purpose of the Presumptive Taxation Scheme in India?

The Presumptive Taxation Scheme aims to simplify tax calculation and relieve self-employed individuals with low turnover from the complexities of bookkeeping and auditing.

Who can adopt the Presumptive Taxation Scheme under Section 44AD?

Resident Individuals, Resident Hindu Undivided Families (HUFs), and Resident Partnership Firms (excluding LLPs) are eligible to adopt this scheme.

Which entities are ineligible for the Presumptive Taxation Scheme of Section 44AD?

Non-residents, those claiming deductions under specific sections, agency businesses, professions u/s 44AA(1), companies, and LLPs are not eligible for this scheme.

Which professions can benefit from the Presumptive Taxation Scheme under Section 44ADA?

Professions such as Legal, Medical, Engineering, Architecture, Accountancy, Technical consultancy, Interior Decoration, and others as notified by CBDT can benefit from this scheme if their gross total receipts do not exceed Rs. 75 lakhs.

What are the advantages of choosing the Presumptive Taxation Scheme?

The benefits include no mandatory maintenance of accounts, no obligatory tax audit (in most cases), simplified advance tax payment, and the use of a simpler ITR form, reducing compliance burdens.

What happens if an individual opts out of the Presumptive Taxation Scheme?

If an individual opts out, they must adhere to regular tax procedures for the subsequent five years. Failure to comply may lead to the ineligibility to avail of the presumptive taxation scheme.

is it possible to declare income at a rate higher than prescribed under Sections 44AD, 44ADA, and 44AE?

Yes, individuals can declare income at a higher rate without special compliance requirements.

Can an individual declare a lower rate of income under the Presumptive Taxation Scheme?

To declare a lower rate of income, one must maintain proper books of accounts and get the audit done u/s 44AB.

What should businesses consider when deciding to opt for Presumptive Taxation?

When deciding to opt for Presumptive Taxation, businesses should consider factors such as their turnover, the nature of income, and profitability ratio. Since individual circumstances may vary, It’s better to consult an Income Tax Professional to determine the most suitable option.

What are the consequences if an individual opts out of the Presumptive Taxation Scheme and their income exceeds the minimum taxable limit?

If an individual opts out and their income surpasses the minimum taxable limit, they will be required to maintain accounting records and undergo an Income Tax audit, starting from the Assessment Year in which they opt out.

Team Master Brains