Understanding Presumptive Taxation Schemes in Income Tax

Presumptive taxation schemes are designed to simplify the process of computing profits and gains for certain categories of taxpayers. Two significant provisions under the Income Tax Act, namely Section 44AD and Section 44ADA, outline the framework for such schemes.

Section 44AD: Provisions for Business Income

Section 44AD applies to resident Individuals, Hindu Undivided Families (HUFs), and firms (excluding LLPs) with a turnover not exceeding Rs. 2 crore. Under this section, if the taxpayer opts not to claim deductions under specified sections, the profits and gains from eligible businesses are deemed to be 8% of the total turnover or gross receipts. However, certain businesses such as those covered under Section 44AE or involving specified professions are exempt from this provision.

An amendment introduced in 2017 allows for a lower presumptive income of 6% if payments are made through specified modes. This provision aims to encourage digital transactions and formalization of the economy.

Section 44ADA: Presumptive Taxation for Professionals

Section 44ADA applies to resident Individuals, HUFs, and firms (excluding LLPs) engaged in specified professions mentioned under Section 44AA. If the gross receipts of such professionals do not exceed Rs. 50 lakh in a previous year, 50% of the total gross receipts are deemed to be income. Eligible professions include legal, medical, engineering, architectural, accountancy, technical consultancy, or interior decoration.

Taxpayers who declare income lower than the presumptive income must maintain proper books of account and undergo audit procedures as per Section 44AB, regardless of turnover.

Section 44AE: Presumptive Taxation for Transporters

Section 44AE is applicable to all categories of vehicle owners engaged in plying, hiring, or leasing goods carriages. If the taxpayer does not own more than 10 goods carriages during the previous year and furnishes PAN to the payer, TDS under Section 194C is not applicable. However, no other business expenditure is allowed under this section.

The computation of income under Section 44AE is based on a fixed monthly income per vehicle, disregarding depreciation. While no depreciation deduction is allowed, the depreciation calculated as per Section 32 is deducted from the asset’s value in the balance sheet to determine the written down value (WDV) of the block of assets.

Conclusion:

In conclusion, presumptive taxation schemes offer a simplified method for certain taxpayers to compute their income, promoting ease of compliance and reducing administrative burdens. However, understanding the eligibility criteria and implications of opting for such schemes is essential for taxpayers to make informed decisions regarding their tax obligations.