Presumptive income - Applicability, Rate & Computation

Hello in this post we discuss the Presumptive income under the Income Tax Act.

We will cover the following topics in this post:

What is Presumptive Income Scheme?

As per Section 44A of the IT Act, 1961, a person who is into business / profession needs to maintain regular account books and get the accounts audited under certain circumstances.

The presumptive taxation scheme was introduced to lessen this burden for small taxpayers. PTS comes under the Section 44AD, 44ADA and 44AE of the IT Act, 1961. In this scheme a person can declare income at a prescribed rate and get relaxation from maintenance of the books of account and from getting their accounts audited.

​​For small taxpayers as per the IT Act of 1961 has framed PTS according to different sections:

  • Section 44AD: For engaged in any business except the business of plying, hiring or leasing of goods carriages referred in Section 44AE.
  • Section 44ADA: For taxpayers engaged in specified professions as mentioned in Section 44AA(1).
  • According to Section 44AE: For taxpayers engaged in the business of plying, leasing or hiring goods carriages and who do not own over 10 goods vehicles during the year.
  • The Section 44B: Special provision for computing profits and gains of shipping business in the case of non-residents.
  • Section 44BB: Special provision for computing profits and gains in connection with the business of exploration, etc., of mineral oils in case of non-residents.
  • As per Section 44BBA: Special provision for computing profits and gains of the business of operation of aircraft in case of non-residents.
  • Section 44BBB: Special provision for computing profits and gains of foreign companies engaged in the business of civil construction, etc., in certain turnkey power projects.

Presumptive Assessment Rate

For business: Any business with turnover less than Rs 2 Cr can opt for this scheme. However, they must declare their profits ie, 8% for non-digital transactions / 6% for digital transactions according to the applicability.

For a professional: He/she can opt for this scheme if they have a gross revenue upto Rs 50 lakhs. He/she should submit 50% of his/her gross revenue as taxable income and pay taxes as per the slab rates on that income. As a result, he/she cannot claim any profession related expenses as a deduction.

Note:

He/she needs to file his return by 31 July of the assessment year, he must file his return in ITR 4. The person is liable for a tax audit when he declares lesser income compared to the presumptive basis income and when his income exceeds the basic exemption limit.

Applicability

The presumptive taxation scheme under Section 44AD is applicable for the following Indian residents:

  1. Individual.
  2. Hindu Undivided Family (HUF).
  3. Partnership Firm (not Limited Liability Partnership Firm)

Note:

  • A non-resident and or any person other than an individual, an HUF or a partnership firm (not Limited Liability Partnership Firm) can not adopt the scheme.
  • Persons who had made any claim towards deductions under section 10A/10AA/10B/10BA or under sections 80HH to ​80RRB in the relevant year cannot claim this scheme.

The PTS applicablity for resident indians in specified professions are:

  • Legal
  • Medical
  • Engineering or architectural
  • Accountancy
  • Technical consultancy
  • Interior decoration
  • Any other profession as notified by CBDT

Note:

A person who adopts PTS is deemed to have claimed all deduction of expenses. Any further claim of deduction is not allowed after declaring profit @ 50%.

The PTS under Section 44AE is applicable for all taxpayer, who are:

  • Engaged in the business of plying, hiring or leasing of goods carriages.
  • Person who does not own over 10 goods vehicles at any time during the year.

Exempted businesses in PTS u/s 44AD

The business that are not covered under the PTS u/s 44AD are:

  1. Business of plying, hiring or leasing goods carriages as mentioned in the Section 44AE.
  2. Person who runs any agency business.
  3. Person who earns income from any form of commission / brokerage.
  4. Any business with total turnover/gross receipts above Rs.2Cr.​

Person practising any profession as in Section 44AA (1).

Computation​ under PTS

We can calculate taxable income under the presumptive income scheme by the following means:

  • If the business is under section 44AD: Computation of income is based on a presumptive basis, i.e. @ 8% or 6% of the turnover / gross receipts of the business for the year. However, they can also declare income higher than the given rate.
  • If professionals are under section 44ADA: Income is computed on a presumptive basis, i.e.,50% of the gross receipts of the profession. However, they can also declare income higher than 50%.

If the business is under section 44A, then income will be computed on:

  • For Heavy Goods Vehicle: Computation of income @ rate of Rs. 1,000 per ton of gross vehicle weight for every month. The taxpayer owns the heavy goods vehicle during this period.
  • Vehicles other than heavy goods vehicles: Income is computed at a rate of Rs 7,500 for every month. The taxpayer owns the goods carriage during this period.

Note:

  • If the actual income is higher than the presumptive rate [Rs. 1,000 / Rs.7,500] you can declare this higher income.
  • Heavy Goods Vehicle – is the goods carriage with gross vehicle weight over 12,000 Kg.

With that, we have come to the end of this post. Share with us your views in the comment section below.