Presumptive taxation refers to a simplified approach for computing taxable income for an eligible taxpayer. It allows an assessee to declare his income at a prescribed rate of total turnover or sales.
It also allows taxpayers to do business without maintaining books of account.
Under this system, Income Tax has given 3 provisions:
- For Business under section 44AD,
- For Professionals Under section 44ADA, and
- For Transporters under section 44AE
In this article, we will cover section 44AD.
Section 44AD: Presumptive Taxation for Business Income
Under this section, an eligible assessee engaged in eligible business with turnover less than 2 Crore can consider his taxable business income (PGBP) as –
- 6% of his digitally* received turnover or gross receipt; and
- 8% of his remaining turnover or gross receipt
The 6% or 8% is the minimum taxable limit and declaration of business income below this limit will cause a taxpayer to maintain proper books of accounts in order to justify his low income. He would also be required to file tax audit if his total income exceeds the maximum amount not chargeable to income-tax [In AY 2019-20 for normal taxpayer it is Rs.2.5 lakh]
Income at a higher rate, i.e. higher than 8% can be declared if the actual income is higher than 8%.
No other deductions are allowed from the computed income, as we can see here that after applying these rates we get the net taxable business income (PGBP). However, deduction of chapter VI-A is available.
*Digitally means- Money received through an account payee cheque or an account payee bank draft or RTGS/NEFT/ECS/Debit or Credit Card/IMPS during the previous year or before the due date specified in sub-section (1) of section 139 in respect of that previous year.
Example: Mr.Ram, a trader during the FY 2018-19 receives 12 lakh in cash and 14 lakh digitally. He also digitally receives Rs.6 lakh on 15th July 2019 relating to FY 2018-19. Calculate PGBP taxable income under section 44AD.
Solution: Assuming due date for filling u/s 139(1) be 31st July 2019-
- On Digitally received turnover = (14+6) * 6% = Rs.1,20,000/-
- On Turnover received in Cash = 12 * 8% = Rs.96,000/-
Therefore, the taxable income under the head PGBP is Rs.2,16,000 (120000+96000)
Who is Eligible for Section 44AD?
An eligible assessee with eligible business is eligible for section 44AD
Let’s get to it one by one!
A. Eligible Assessee: Following taxpayers are eligible for section 44AD
- Resident Individual
- Resident HUF
- Resident Partnership Firm (LLP)
Further, the above 3 taxpayers shall not claim any deduction under section 10A/10AA/10B/10BA or under section 80HH to 80RRB in the relevant year.
B. Eligible Business under section 44AD
- Any business except the business of plying, hiring or leasing goods carriages referred to in section 44AE; and
- Whose total turnover or gross receipts from all his businesses in the previous year does not exceed 2 Crore.
Who is not eligible for section 44AD?
Following taxpayers are ineligible for this section-
- Professional (u/s 44AA). As they are already covered under section 44ADA
- Agency Business
- A person earning a commission or brokerage income
Opting Presumptive Taxation or Scheme for at least 5 years [Section 44AD(4)]
Once a taxpayer opts for this scheme than it would be beneficial for him to file his next 5 year’s income tax return in the same scheme only. (Applicable From the Financial year 2016-17 i.e AY 2017-18)
If he decides to OPT-OUT of the scheme in any of the next 5 years than he will be DISALLOWED from this scheme for the next subsequent 5 years.
Not only this, If his total income exceeds the maximum amount not chargeable to income-tax [In AY 2019-20 for normal taxpayer it is Rs.2.5 lakh] than-
- He has to keep and maintain books of accounts [section 44AA(2)], and
- He will also be required to get his accounts audited (Tax Audit under section 44AB)
It’s a sort of penalty.
Confused? Let’s understand with an example
|Mr. Ram selected to file income tax return under section 44AD||2017-18, 2018-19 and 2019-20|
|Subsequently, he Selected to file normal income tax return i.e NOT under section 44AD||2020-21|
|He will be DISALLOWED to file income tax return under presumptive taxation scheme for the next 5 assessment years||2021-22 TO 2025-26|
In addition to the prohibition from filing return under section 44AD, Mr.Ram will also be required to maintain books of accounts and file Tax audit if his total income exceeds the maximum amount not chargeable to income-tax.
Other Important Points under section 44AD
- Expenses relating to PGBP will not be allowed. [section 30-38 of Income Tax]
- Although depreciation expense is not allowed, the fixed asset will get depreciated normally as if depreciation has actually been allowed.
- Assessee under presumptive taxation is also liable to pay advance tax. They can pay 100% of advance tax by 15th March of the financial year.
- Assessee under presumptive taxation can take the deduction of Chapter VI-A.
So the Big news is,
Tax Audit under section 44AB(e) will be necessary if assessee’s total income exceeds the maximum amount not chargeable to income-tax AND-
(i) He declares his income below 8% or 6%; or
(ii) He OPT-OUT of the scheme within 5 years of his first OPT-IN.