Presumptive Taxation Scheme or PTS is a scheme wherein there is no requirement to maintain books of accounts. Further, in order to avail this scheme, the taxpayer must have a turnover below the prescribed limit. In simple words, the PTS is for small taxpayers who do not require to maintain books of account.
In addition to the above, the Income Tax Act, 1961 mandates that every person engaging in business or profession has to maintain regular books of account and get these books of accounts audited. However, in order to give relief to small taxpayers, the Act provides for provisions of presumptive taxation scheme under Section 44AD, Section 44ADA and Section 44AE.
Why there is need for Presumptive Taxation Scheme?
Maintaining books of accounts on daily basis involves lot of compliances which can be a tedious work for small taxpayers. Therefore, in order to reduce the work load and liability on these small taxpayers, they have been provided with the scheme of presumptive taxation.
Also Read: 10 Ways to save your taxes
Additionally, a person adopting the PTS can declare income at a prescribed rate and, in turn, is relieved from the job of maintenance of books of account and also from getting the accounts audited.
When can a taxpayer opt for Presumptive Taxation Scheme?
The taxpayer can opt for PTS only if the turnover does not exceed the following limits:
– Business taxpayers: Rs. 2 crores
– Professionals: Rs. 50 lacs
Note 1:
The above turnover limits are subject to certain terms and conditions wrt some businesses.
Note 2:
Through the Union Budget, 2023 the new presumptive taxation limits under Section 44AD & Section 44ADA applicable from the FY 2023-24 (AY 2024-25) are Rs. 75 lacs and Rs. 3 crores respectively. This new limit however, is subject to the condition that 95% of the receipts must be through online modes.
Meaning of presumptive taxation scheme
For small taxpayers, the following are the presumptive taxation schemes as per the Income Tax Act:
– Firstly, PTS under Section 44AD
– Secondly, PTS under Section 44ADA
– Thirdly, PTS under Section 44AE
Also Read: Income Tax Audit: Small Taxpayers Or Presumptive Income
About presumptive taxation under Section 44AD
The PTS under section 44AD gives relief to small taxpayers engaging in any business.
The provisions of Section 44AD are applicable to
– Resident Individual
– HUF
– Partnership firm (not LLP)
On the contrary, the provisions of section 44AD are not applicable to
– Firstly, to Non resident individual
– Secondly, to Limited Liability Partnership
– Thirdly, to person who has made any claim towards deductions under section 10A/10AA/10B/10BA or under sections 80HH to 80RRB in the relevant year.
– Fourthly, to business of plying, hiring or leasing of goods carriages referred to in section 44AE.
– Fifthly, to a person who is carrying on any agency business.
– Sixthly, to a person who is earning income in the nature of commission or brokerage
– Seventhly, to person carrying on profession mentioned under section 44AA(1)
– Eightly, to Insurance agent
– Lastly, to person whose total turnover or gross receipts for the year exceed Rs. 2,00,00,000 or Rs. 3,00,00,00 (if 95% of the receipts are through online mode – from FY 2023-24 onwards).
Also Read: Section 194D: TDS On Insurance Commission
Presumptive taxation under Section 44ADA
The presumptive taxation under section 44ADA gives relief to small taxpayers engaged in a specified profession.
Eligible persons who can take advantage of the presumptive taxation of section 44ADA are
– Firstly, legal
– Secondly, medical
– Thirdly, engineering
– Fourthly, accounting
– Fifthly, technical consultancy
– Sixthly, interior decoration
– Lastly, any other profession as notified by CBDT
Also Read: Deduction Under Section 80C & Its Allied Sections
Applicability of presumptive taxation under Section 44AE
The scheme of section 44AE is applicable to small taxpayers in the business of plying, hiring or leasing of goods carriages.
The eligible taxpayer and eligible business for the purpose of the scheme of section 44AE are:
– Every person (i.e., an individual, HUF, firm, company, etc.)
– In addition to this, such person must not own more than 10 goods vehicles at any time during the year.
Also Read: Which Tax Regime Suits You: Old or New?
Limitations of Presumptive Taxation Scheme
The limitations of presumptive taxation scheme under different provisions are as follows:
| Limitation | Section | Description | Amount/Threshold |
|---|---|---|---|
| Turnover Limit | Section 44AD | The presumptive taxation scheme is available for eligible businesses with a turnover below a specified threshold. |
Rs. 2 crore for businesses covered under Section 44AD. (From the FY 2023-24, this limit has now been increased to Rs. 3 crores provided 95% of the receipts are through online modes) |
| Turnover Limit | Section 44ADA | The presumptive taxation scheme is available for eligible professions with a turnover below a specified threshold. |
Rs. 50 lakh for professionals covered under Section 44ADA (From the FY 2023-24, this limit has now been increased to Rs. 75 lakh provided 95% of the receipts are through online modes) |
| Maintenance of Books | Section 44AA(3) | Taxpayers opting for the presumptive taxation scheme are not required to maintain regular books of accounts. | Not applicable |
| Deduction of Expenses | Section 44AD(2) | Businesses under the presumptive taxation scheme cannot claim deductions for various expenses allowed under normal taxation. | Not applicable |
| Carry Forward of Losses | Section 44AD(1) | Losses incurred by businesses under the presumptive taxation scheme cannot be carried forward and set off against future income. | Not applicable |
| Assessment of Income | Section 44AD | The income of taxpayers opting for the presumptive taxation scheme is assessed at a predetermined rate based on turnover. | 8% of turnover for businesses covered under Section 44AD |
| Assessment of Income | Section 44ADA | The income of taxpayers opting for the presumptive taxation scheme is assessed at a predetermined rate based on turnover. | 50% of gross receipts for professionals covered under Section 44ADA |
Computation of Presumptive Taxation Scheme
Computation of presumptive taxation scheme under Section 44AD, 44ADA and 44AE is as follows:
| Particulars | Section 44AD | Section 44ADA | Section 44AE |
|---|---|---|---|
| Applicability to persons who is engaged in |
Resident Individuals HUF Partnership Firm (not LLP) |
Medical Accounting Legal Interior decoration and many more |
Plying, hiring or leasing of goods carriages, & Has not more than 10 vehicles |
| Limitation | Turnover should not exceed ₹2 crore | Gross annual receipt should not exceed ₹50 lacs |
For heavy vehicles – ₹1,000 per month per ton of vehicle Other than heavy vehicles – ₹7,500 per vehicle per month per vehicle |
| Computation | Computed at the rate of 6% or 8% turnover or gross receipts in a year | Computed at rate of 50% of the total gross receipts of profession in a year | Person should not own more than 10 goods vehicles at any time in a year |
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