Presumptive Taxation under 44AD, 44ADA, 44AE of Income tax

The aim of the Presumptive Taxation Scheme under sections 44AD, 44ADA and 44AE of the Income tax act is to simplify the process of computation of Income for people in smaller businesses and professions. Income Tax is levied on the profits earned by the person during the year, which has to be computed after reducing various expenses of the business and also after applying a list of deductions, exemptions and disallowances.

Income Tax is levied on the profits earned and not directly on the Sales turnover. Smaller businesses have a tough time keeping records of all the expenses as there can be a large number of small expenses. Keeping a record of sales is comparatively easier and important for the business as well. To simplify this process of computation of profits, there has to be a mechanism to calculate the taxable income directly on the basis of sales turnover, without keeping an exhaustive record of expenses and going through a list of deductions and exemptions.

Therefore, to ease this process, the government has introduced a Presumptive Taxation system wherein the Income (profit) is computed as a percentage of Sales. Income = defined percentage (%) of Sales

It is very easy for small taxpayers to compute their Income in the above manner. They are not required to do the following:

• Not required to maintain Invoices and records of all expenses
• Not required to deduct TDS on Salary Payments and other Expenses
• Not required to maintain Books of Accounts
• Not required to comply with Provisions of Tax Audit

It also saves a lot of time and money in complying with the Tax Laws. Whether the taxpayer opts for the Presumptive Scheme of Taxation or not, the rate of tax will remain the same. Only the manner of computation of income changes.

The Presumptive Taxation scheme is available to all types of businesses and professionals if their sales or gross receipts are within a certain threshold. The Taxpayers are free to choose between Presumptive Income or Normal Income. As per the Income tax department, 26% (1.75 crores) of the total tax returns opted for Presumptive income in AY 2021-22.

Categories for Presumptive Taxation

For this scheme, the law has divided the taxpayers into three categories:

*Although section 44AD says that it is applicable only to eligible “business”, the income tax portal still allows certain “services” under the business codes prescribed under 44AD.

The sales of all eligible businesses will be added for threshold calculation under Section 44AD. The total value of all the eligible Professional services will be added for threshold calculation under Section 44ADA.

Presumptive income under section 44AD [General Business or Services]

Following types of taxpayers and businesses are allowed to avail the benefits of the presumptive income scheme.

The income of any person adopting Section 44AD will be considered at a flat rate of 8% of Sales. For all payments received digitally, the profits will be assumed at 6% of such payments provided the payments are received before the due date of filing of Income Tax Return.

This income will be the final income and no separate deduction for expenses or depreciation will be allowed. Salary, Interest paid to Partners will also not be allowed as a deduction. (Amendment applicable from FY 2016-17)

In case the taxpayer has earned an income that is higher than the rates specified (i.e. 6%/8%), he has an option to disclose such higher income. If the taxpayer feels his Income is lower than 8% or 6%of Sales, he can opt for the Normal Taxation Scheme.

In that case, the taxpayer will also be required to maintain proper books of accounts under Section 44AA if his annual income exceeds Rs. 1,50,000 or Annual Sales exceed Rs. 25,00,000. He will also be liable to tax audit if his Sales turnover during the year is more than Rs. 1 Crore.

A taxpayer can opt out of the Presumptive income scheme at any time. However, he cannot avail the benefit of this scheme again for the next 5 years. Also, Tax Audit is mandatory for the next 5 years.

Presumptive income under section 44ADA [Professional Services]

Before 2016, Professionals were kept out of this scheme of Presumptive Income. They were required to maintain all books of accounts, maintain a copy of invoices for all expenses and get their books audited, if applicable.

To simplify the taxation for these Professionals, the government introduced Presumptive Taxation for Professionals under Section 44ADA which is applicable from FY 2016-17.

44ADA can only be opted by a person resident in India and who is an Individual, HUF or Partnership Firm. It is not applicable for any other type of entity like LLP, Company etc.

The scheme under Sec 44ADA is introduced to give relief to small taxpayers who are engaged in specified professions. An eligible person engaged in any of the following professions and services can take advantage of the presumptive scheme of taxation under Section 44ADA:

Above businesses, are classified as Professions for 44ADA, and all other businesses are classified as Business.

Contract workers cannot be called salaried employees and are treated like Freelancers. Freelancers pursuing any of the above-mentioned professions can avail the benefit of Section 44ADA.

Any professional taxpayer claiming the benefit of Section 44ADA can show his Income as 50% of the Value of Services Provided in that year.

Income = 50% of Value of Services Provided in a year

The income of any person adopting Section 44ADA will not be computed as per the normal system of computation of Income and will be considered as 50% of the Value of Services Provided. In the case of Professionals who are providing services – the total value of services provided during the year will be considered as the Sales.

A taxpayer opting for the Presumptive Income scheme under this section will be assumed to have claimed a deduction of all the expenses. Any further claim of deduction will not be allowed after declaring the Income at 50% of the Value of Services Provided.

Presumptive income under section 44AE [Transportation Services]

The provisions of section 44AE are available to every person (even an LLP and a company can opt for this section)

If a person opts for the presumptive income scheme under section 44AE, income is computed on an estimated basis as mentioned below:-

1. Light Goods Vehicle (Capacity less than 12000 metric tons) – Rs. 7,500 per month per vehicle
2. Heavy Goods Vehicle (Capacity more than 12000 metric tons) – Rs. 1,000 per ton per vehicle

A person opting for Section 44AE is deemed to have claimed deduction of all expenses. No other expense will be allowed as a deduction except for salary and interest paid to its partners in the case of a partnership firm. Salary and Interest can only be deducted while computing income under Section 44AE and not under Section 44AD or 44ADA.

Any person engaged in any of the following services can take advantage of the presumptive scheme of taxation under Section 44AE:

Frequently Asked Questions