Presumptive Income – Updated! [Section 44AD, 44ADA, 44AE]
The option of the presumptive scheme has always been an interesting as well as a confusing issue among taxpayers. With the Budget 2016 coming into effect from the FY 2016-17, there have been some significant additions/deletions to the scheme, which you should be aware of! The presumptive taxation scheme has been framed to give relief to small taxpayers from the tedious job of maintenance of books of account u/s 44AA and getting the accounts audited u/s 44AB. Under the said scheme, the taxpayer can declare income at a prescribed rate and avail of the benefits u/s 44AD, 44ADA, and 44AE.
Budget 2023 increased the threshold u/s 44AD to Rs 3 crores from Rs 2 crores, provided the cash receipts should be less than 5%.
What is Presumptive Taxation Scheme?
Small business owners form a large part of the Indian economy and have a significant contribution to the country’s GDP. However, maintaining the books of accounts and getting them audited can seem like a tedious job for many of them. The income tax department came up with the presumptive income tax scheme to provide respite to such small business owners from the requirement of maintaining books of accounts and getting the accounts audited. It is applicable for small taxpayers like freelancers, doctors, lawyers, advocates, professionals, MSME businesses, and contractors. There are 3 sections that cover the provisions of the presumptive income scheme. These sections have been explained in detail in the next sections.
It is designed to give relief to small taxpayers being resident individuals, resident HUF, and resident partnership firms (not LLP) engaged in any business who have not claimed deductions u/s 10A/10AA/10B/10BA or 80HH to 80RRB for the relevant year, but does not include the following businesses:
- Business of plying, hiring, or leasing of goods carriages referred to in section 44AE;
- A person who is carrying on any agency business;
- A person who is earning income in the nature of commission or brokerage;
- A person who is engaged in any profession as prescribed u/s 44AA (1).
The presumptive taxation scheme of section 44AD can be exercised only if your total turnover or gross receipts from the business do not exceed Rs. 2 crores for AY- 2023-2024 onwards. However, these limits were revised from 2 crores to 3 crores in Budget 2023 if the cash receipts of such businesses are less than 5% of the total receipts. The new rates are applicable from AY 2024-25.
In case you are adopting the provisions of section 44AD, your income will not be computed in the normal manner but will be computed @ 8% (6% in case of digital receipts ) of the turnover or gross receipts of the eligible business for the year. The income computed under this scheme will be the final taxable income of the business covered under the presumptive taxation scheme, and no further expenses will be allowed or disallowed even on account of depreciation. 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.
Income at the higher rate, i.e., higher than 8%, can be declared if the actual income is higher than 8%.
You can declare income at a lower rate (i.e., less than 8% or 6%); however, if you do so and your income exceeds the basic exemption limit, then you will be required to maintain the books of accounts u/s 44AA and to get your accounts audited u/s 44AB.
Further, the whole amount of advance tax is payable on or before 15th March, and no separate quarterly dates are specified [Earlier, no advance tax was payable by the taxpayers opting for this scheme].
A discouraging provision has also been introduced with the Budget 2016 i.e., if you opt for this scheme, then you are required to follow the same for the next 5 years, and in case you fail to do so, then the presumptive taxation scheme will not be available to you for the next 5 years. In such a case, you will also be required to keep and maintain books of account and get your accounts audited.
For example, if you opt for this scheme in FY 2016-17, 2017-18, and 2018-19 but not in 2019-20, then you will not be eligible to claim the benefit of the presumptive taxation scheme for the next five years, i.e., from FY 2020-21 to 2024-25.
Budget 2023 increased the threshold u/s 44ADA to Rs 75 lakhs from Rs 50 lakhs, provided the cash receipts should be less than 5%.
Are you an engineer? a lawyer? an interior decorator? Or any other specified professional? Then, this new section 44ADA is for you! With the introduction of this new section, even professionals are eligible for the presumptive taxation scheme. The highlights of this scheme are as follows :
- The presumptive taxation scheme u/s 44ADA is designed to give relief to a person resident in India whose total gross receipts do not exceed Rs. 50 lakh and is engaged in the specified professions being the following:
- Engineering or architectural
- Technical consultancy
- Interior decoration
- Any other profession as notified by CBDT.
- In case, you are adopting the provisions of section 44ADA, your income will be computed @50% of the total gross receipts of the profession for the year, and any further claim of deduction(s) of expenditures is not admissible after declaring profit @ 50% though you can declare profit more than 50% too if you wish.
- However, if you declare profit less than 50%, and your income exceeds the basic exemption limit, then you will be required to maintain the books of accounts u/s 44AA and to get your accounts audited u/s 44AB.
- The income computed under this scheme will be the final taxable income of the profession covered under the presumptive taxation scheme, and no further expenses will be allowed or disallowed even on account of depreciation.
- The provisions relating to advance tax, maintenance of books of account, and audit of accounts are the same as discussed above. Further, the provision of opting for the scheme for continuous 5 years is not applicable to professionals.
- For example, if your gross receipts for the year 2022-23 amount to Rs. 4,80,000, then your presumptive income shall be Rs. 2,40,000 i.e. 50% of Rs. 4,80,000.
The scheme u/s 44AE is designed to give relief to every person (an individual, HUF, firm, or company) who is engaged in the business of plying, hiring, or leasing goods carriages and who does not own more than 10 goods carriage vehicles at any time during the relevant year.
- One major difference as compared to Section 44AD is that “person” in this section includes every person, i.e., an individual, HUF, firm, company, etc.
- In case you are adopting the provisions of section 44AE, your income will be computed @Rs. 7,500 per vehicle per month during which the vehicle is owned by you and where the part of the month would be considered as a full month.
- And if the actual income is higher than the presumptive rate, i.e., higher than Rs. 7,500, then such higher income can also be declared as per the wish of the taxpayer.
- Further, you can declare income at a lower rate (i.e., at less than Rs. 7,500 per goods vehicle per month), but if you do so and your income exceeds the basic exemption limit, then you will be required to maintain the books of accounts u/s 44AA and to get your accounts audited u/s 44AB.
- The provisions relating to the admissibility of deductions, depreciation, written down value of the asset, advance tax, maintenance of books of account, and audit of accounts are the same as discussed above. Only a partnership firm can claim the further deduction on account of remuneration and interest paid to partners.
- For example, if you are engaged in the business of plying, hiring, or leasing of goods carriage, and you own 7 vehicles throughout the year, then your income u/s 44AE shall amount to Rs. 6,30,000/- (i.e., Rs. 7500 x 7 vehicles x 12 months).
Hope this guide helped you get some insights into the presumptive taxation scheme. Whether you have opted for the presumptive taxation scheme or not, you still have to file ITR at the end of the year. Tax2win provides the best ITR filing solution for your needs. It is a smart, AI-integrated tax-filing portal that automatically selects the applicable ITR form and also pre-fills 90% of the data. With Tax2win, you can complete ITR filing within a few minutes. And if you get need help, our CAs are always available at your service. File your ITR or
Frequently Asked Questions
Q- Can a person use 44AD and 44ADA simultaneously if he has income from both businesses, as well as a profession?
from both businesses, as well as a profession?
Yes, a person can use 44AD and 44ADA simultaneously if he has income from both businesses as well as a profession.
Q- Section 44AE - can I file the ITR without having any goods carriage in the presumptive scheme? As the section says, 'should own no more than 10 goods carriage vehicles'?
You need to have at least one goods carriage vehicle in order to be eligible to show income u/s 44E while filing a return. Otherwise, without a single goods carriage vehicle, an individual cannot be said to be engaged in the business of goods carriage and hence would not be eligible for showing presumptive income u/s 44E.
Q- My status is RNOR (Resident but not ordinarily resident), can I file returns under 44ADA (Presumptive Scheme)?
Section 44ADA applies to resident assessees. Since an RNOR is also a resident assessee, it applies to you as well. Hence, you can file returns under 44ADA.
Q- Can a management consultant avail presumptive taxation under Section 44AD of the Income Tax Act?
Yes, a management consultant can avail presumptive taxation under section 44AD, since a management consultant is not covered under the persons excluded from applicability of Section 44AD.
Q- Can I file the ITR 4 under 44ADA if I filed the ITR 3 last year which was the first year of filing? The 5 years limit is for 44ADA as well.
Yes, the limit of 5 years also applies to Section 44ADA
Q- Can we use section 44AD and show 8% even if profit is 20%?
Section 44AD is applicable to small businesses to provide them ease of compliance and save them from the requirement of maintenance of detailed books and getting them audited annually. Hence, small businesses can avail the benefit of showing 8% profit even if it is 20%. However, ethically, they should show the actual amount of profit as 8% is the minimum profit to be shown.
Q- Section 44AD or 44ADA, Which taxation is better to save tax when filing income through Google Adsense earnings?
Google Adsense earnings are of the nature of commission income as they are received for the display of advertisements on the person’s page, video, or other online content. Since commission and brokerage income have been specifically excluded from the applicability of Section 44AD, and neither are they included in the applicability of Section 44 ADA, which applies only to certain specified professions.
Q- Can I file ITR 4 if a person earns income from brokerage for A.Y. 2023-24?
NO, you cannot file ITR 4 if a person earns income from brokerage for A.Y. 2023-24 since ITR 4 is for individuals showing business income u/s 44 AD, and brokerage has been specifically excluded from the scope of Section 44AD.
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