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:
| Category | Section | Deemed Income | Threshold | Eligible Person |
|---|---|---|---|---|
| General Business or Services* | 44AD | 8% or 6% of gross receipts | available upto Rs. 2 crores of gross receipts. | Resident Individual, HUF, Firm (Other than LLP) |
| Professional Services | 44ADA | 50% of professional receipts | available upto Rs. 50 lakhs of gross receipts. | Resident Individual, Firm (Other than LLP) |
| Transportation Services | 44AE | 7500 per vehicle per month | available upto 10 goods vehicles. | Any person |
*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.
| Taxpayer type | Availability of 44AD |
|---|---|
| Business Individuals (Proprietorship Firms) | Yes |
| Hindu Undivided Family (HUF) | Yes |
| Partnership Firms (other than LLP) | Yes |
| Limited Liability Partnership Firms (LLP) | No |
| Company | No |
| Commission Agents or Brokers | No |
| Employed Individuals | No (Salary head applicable) |
| Professional Individuals | No (44ADA is applicable) |
| Transporters | No (44AE is applicable) |
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.
| Taxpayer type | Availability of 44ADA |
|---|---|
| Professional Individuals (Proprietorship Firms) | Yes (subject to type of work) |
| Freelancer Individuals | Yes (subject to type of work) |
| Contract Worker | Yes (subject to type of work) |
| Partnership Firms (other than LLP) | Yes (subject to type of work) |
| Limited Liability Partnership Firms (LLP) | No |
| Company | No |
| Commission Agents or Brokers | No |
| Hindu undivided family (HUF) | No |
| Employed Individuals | No (Salary head applicable) |
| Transporters | No (44AE is applicable) |
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:
| Category | Business Code | Type of Professional Service |
| Computer And Related Services | 14001 | Software Development |
| Computer And Related Services | 14002 | Other Software Consultancy |
| Computer And Related Services | 14003 | Data Processing |
| Computer And Related Services | 14004 | Database activities & Electronic Content Distribution |
| Computer And Related Services | 14005 | Other IT-enabled services |
| Computer And Related Services | 14006 | BPO Services |
| Computer And Related Services | 14008 | Maintenance and repair of office, accounting and computing machinery |
| Professions | 16001 | Legal Profession |
| Professions | 16002 | Accounting, Book-keeping & Auditing Profession |
| Professions | 16003 | Tax Consultancy |
| Professions | 16004 | Architectural Profession |
| Professions | 16005 | Engineering & Technical Consultancy |
| Professions | 16007 | Fashion Designing |
| Professions | 16008 | Interior Decoration |
| Professions | 16009 | Photography |
| Professions | 16013 | Business and management consultancy activities |
| Professions | 16018 | Secretarial Activities |
| Professions | 16020 | Film Artist |
| Health Care Services | 16019_1 | Medical Profession |
| Health Care Services | 18001 | General Hospitals |
| Health Care Services | 18002 | Specialities & Super Specialities Hospitals |
| Health Care Services | 18003 | Nursing Homes |
| Health Care Services | 18004 | Diagnostic Centres |
| Health Care Services | 18005 | Pathological Laboratories |
| Health Care Services | 18010 | Medical Clinics |
| Health Care Services | 18011 | Dental Practice |
| Health Care Services | 18012 | Ayurveda Practice |
| Health Care Services | 18013 | Unani Practice |
| Health Care Services | 18014 | Homoeopathy Service |
| Health Care Services | 18015 | Nurses, Physiotherapists and other Para Medical Practitioners |
| Health Care Services | 18016 | Veterinary Hospitals and Practice |
| Health Care Services | 18017 | Medical education |
| Health Care Services | 18018 | Medical research |
| Health Care Services | 18019 | Practice of alternative medicine |
| Health Care Services | 18020 | Other healthcare services |
| Culture And Sport | 20010 | Individual artists excluding authors |
| Culture And Sport | 20011 | Literary activities |
| Culture And Sport | 20012 | Other cultural activities n.e.c. |
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:-
- Light Goods Vehicle (Capacity less than 12000 metric tons) – Rs. 7,500 per month per vehicle
- 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:
| Category | Business Code | Type of Service |
|---|---|---|
| Renting Of Machinery | 08001 | Renting of land transport equipment |
| Transport & Logistics Services | 11002 | Packers and movers |
| Transport & Logistics Services | 11008 | Freight transport by road |
| Transport & Logistics Services | 11010 | Forwarding of freight |
| Transport & Logistics Services | 11011 | Receiving and acceptance of freight |
| Transport & Logistics Services | 11012 | Cargo handling |
| Transport & Logistics Services | 11015 | Other Transport & Logistics services n.e.c |
Frequently Asked Questions
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Can the services not covered under section 44ADA, be covered under section 44AD?
Although 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. Please refer to the complete list of business codes allowed under 44AD for a better understanding.
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Can we opt for sections 44AD and 44ADA simultaneously?
As per section 44AD(6), 44AD cannot be opted simultaneously with 44ADA. Still, the income tax portal allows opting for both 44AD and 44ADA simultaneously, if the assessee is carrying on a business and a profession both.
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Can an agent or broker avail of the benefit of presumptive taxation?
A person who is carrying on any business as an agent or a person who is earning income in the nature of Commission or Brokerage is not allowed to avail of the benefits of presumptive taxation.
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If a person opts for Presumptive Taxation, is he required to maintain books of Accounts?
Presumptive taxation is introduced to reduce compliances so it exempts businesses from maintaining books of accounts subject to certain conditions.
