What is the presumptive taxation scheme

It becomes tedious for small businesses and professionals with a low turnover to maintain complete books of accounts for taxation purposes. To assist them, the government has come up with the presumptive taxation scheme.

What is presumptive taxation scheme?
The presumptive taxation scheme has been framed under Sections 44AE, Sections 44AD, and  Sections 44ADA of the Income Tax Act. A person or business adopting this scheme is taxed at an assumed rate of income instead of the actual income.

Which businesses can benefit from this scheme?
Under Section 44 AD, the following can benefit from this scheme
1) Resident Individual
2) Resident HUF
3) Resident Partnership Firm (does not include LLP Firm)

Either of these with a total business turnover of less than ₹2 crores can declare their presumptive income at 6% (for cheque, draft or electronic clearing systems), or 8% (for cash receipts). Tax will be calculated on this income.

Which professionals can benefit from this scheme?
Under Sections 44ADA, professionals who are residents of India belonging to the following professions can benefit from the scheme.

  1) Legal​
2) Engineering or architectural
3) Medical
4) Accountancy
6) Interior decoration
5) Technical consultancy
7) Any other profession notified by the CBDT
If a professional’s gross receipts do not exceed ₹50 lakhs in a financial year, their presumptive income will be 50% of gross receipts. Tax will be calculated on this income.

Who else can benefit from this scheme?
Under Section 44AE, certain persons involved in leasing or hiring goods carriages can be taxed on presumptive income. The number of carriages owned should not be more than 10 at a time in the previous year.

Are beneficiaries of presumptive taxation scheme allowed any further deduction of expenses?
Beneficiaries of this scheme under Sections 44AD, 44ADA, and 44AE are not allowed any deductions after presumptive income. This income is computed after allowing deduction of expenses deductible, and disallowing expenses which are not deductible under the Income Tax Act. However, no further deductions are allowed, except for certain expenses under Section 44AE.

Who is not eligible for this scheme?

  • A business of leasing, hiring, or plying goods carriages mentioned in sections 44AE.
  • A person involved in the agency business.
  • A person who earns income through brokerage or commission.
  • Any business of which gross receipts or total turnover exceed ₹2 crores.

Thanks to presumptive taxation, freelancers and professionals who don’t have employers sorting out a good part of their income tax documentation are at a great advantage. So are small businesses who would focus on growing their business rather than on computing taxes.