If you are a businessman or a professional, typically you need to maintain the books of accounts and compute your profits to file your income tax returns. There is also a simpler method of offering income to tax on a presumptive basis under section 44AD, section 44ADA & Section 44AE. If one adopts presumptive taxation then one has to declare income at the prescribed rate and no other deductions are allowed. One has to pay the entire advance tax by 15 March. This article explains Presumptive Tax in detail.

Overview of Presumptive taxation scheme

Taxpayers who are earning Income from Business or Profession can opt for Presumptive Taxation Scheme or PTS

• • A person adopting PTS can declare income at a prescribed rate which depends on whether one is professional(50% under 44ADA if gross receipts upto 50 lakhs), runs goods carriages(44AE) or is a small businessman(8% or 6% under 44AD)
  • The professionals eligible for Presumptive Taxation Scheme are architectural professional, interior decorator, advertiser or technical consultant. Is applicable only for resident assessee whose total gross receipts of profession do not exceed fifty lakh rupees.
  • The presumptive taxation scheme of section 44AD can be opted by the eligible persons if the total turnover or gross receipts from the business do not exceed the limit prescribed under section 44AB​  i.e 2 crores. (i.e., Rs. 2,00,00,000).
  • A person earning income through commission or brokerage cannot adopt the presumptive taxation scheme of section 44AD​, Ex: Insurance agents
  • You are not allowed to deduct any business expenses against the income.
  • For section 44AD, separate deduction on account of depreciation is not available. However, the written down value of any asset used in such business shall be calculated as if depreciation as per section 32 is claimed and has been actually allowed.
  • But you are allowed to section 80 deductions (80C, 80D etc)  i.e Net Taxable Income = Gross Taxable Income – Deductions
  • You need to pay tax on balance total income.
  • If you decide to opt for PTS  you have to file ITR under PTS for the next five years. You may opt-out of it before five years, but then you will not be allowed to re-opt for PTS for the next five years from the year in which you opted out.
  • You have to pay 100% Advance Tax by 15th March. No need to comply with the requirement of quarterly instalments due dates (June, Sep, Dec) of advance tax.
  • If he fails to pay the advance tax by 15th March of the previous year, he shall be liable to pay interest as per section 234C
  • Taxpayers opting for PTS can file return in Form ITR 4 if they don’t have any Capital Gain Income(i.e they haven’t sold any asset like Property, Mutual Funds, Stocks etc) Else they have to file ITR3.
  • A person may voluntarily disclose his business income at rates more than those prescribed under section 44AD,44ADA & 44AE.
  • A person can declare his income at a rate lower than those prescribed under section 44AD,44ADA & 44AE. However, then he is required to maintain the books of account and has to get his accounts audited.
• If you don’t claim the Presumptive taxation scheme You can show Income from Business or Profession
  • you can file ITR3
  • You need to maintain Books. Example of books to maintain is given here.
  • You can claim expenses deduction

What is Presumptive taxation? Its sections 44ADA, 44AD, 44AE

Three types of taxpayers are eligible for this taxation scheme under different sections. Let’s look at these sections in detail.

Section  44ADA: Professional and Presumptive Taxation

A Professional resident in India and is in the following professions is eligible under section 44ADA. He has to offer at least 50% of the total gross receipts for taxation.  He cannot deduct their expense from Income. Many Freelancers, Bloggers, YouTubers can also come under this category. Our article Adsense Earnings for Blog, YouTuber : GST, Income Tax etc explains this in detail.

• a. Legal
• b. Medical
• c. Engineering
• d. Architecture
• e. Accountancy
• f. Technical consultancy
• g. Interior Decoration or
• h. Other professions notified by CBDT,
• whose gross receipts/turnover during the financial year does not exceed Rs. 50 Lakh

Example of Professional using Presumptive Taxation

Mr.A is a Doctor who earned 40 lakhs during the Financial year. As his Gross receipt is less than 50 lakhs. He is eligible for presumptive scheme his taxable income would calculate as follows.

• Gross receipt                                      Rs 40,00,000 (40 lakhs)
• Taxable Income is 50 % ie              Rs 20,00,000 (20 akhs)

Income tax is calculated & paid on 20 lakhs.

Once you get taxable income One can claim deductions under sections 80C, 80D etc to find actual

Presumptive Taxation in ITR4 under section 44ADA

Section 44AD and Presumptive Taxation

Other resident small taxpayers (individual, HUF and Partnership Firms (LLP is not eligible) ) whose total turnover or gross receipts during the financial year does not exceed 2 crore applicable from 1^st April 2016. (The rate was increased from  1 crore in Budget 2016)

If a  person adopts the provisions of section 44AD, income is computed on a presumptive basis at the rate of 8% of the turnover or gross receipts of the eligible business for the year.

In order to promote digital transactions and to encourage small unorganized business to accept digital payments, section 44AD is amended with effect from the assessment year 2017-18 to provide that income shall be computed at the rate of 6% instead of 8% if turnover/gross receipt is received by an account payee cheque or an account payee bank draft or use of electronic clearing system through a bank account or through such other electronic mode as may be prescribed during the previous year or before the due date of filing of return under section 139(1)

A person who is earning income in the nature of commission or brokerage cannot adopt the presumptive taxation scheme of section 44AD​. Insurance agents earn income by way of commission and, hence, they cannot adopt the presumptive taxation scheme of section 44AD​.

Example of Section 44AD

• Suppose the Total turn over of a  X partnership firm is  11500000 and their expense is  10000000
• Total Turn over  is: 1,15,00,000
• Taxable Income   @ 8 %  on  Turnover: 11500000 x 8 % = 920000

Example of Section 44AD

Shrey runs a Kirana shop and his gross receipts are Rs 75,12,260 from this business. He also wants to claim depreciation for 1 large refrigerator and a computer with billing system he purchased for Rs 2,50,500. He also spent Rs 1,50,000 buying new racks for displaying his good.

If Shrey opts for the presumptive scheme under section 44AD, he will not be allowed to deduct expenses for the purchase of the new rack. deduct depreciation from this income.

His net income is computed as 8%(assuming all cash receipts) of Rs 75,12,260 = Rs 6,00,981.

Presumptive Taxation in ITR4 under section 44AD

Under section 44AE and Presumptive Taxation for Goods Carriages

Any Person (i.e. an individual, HUF, firm, company, etc) engaged in the business of plying, hiring or leasing of goods carriages and who does not own more than 10 goods vehicles at any time during the year come under Sec. 44AE.

• If an assessee is engaged in a trade of passenger carrying vehicles or passenger transport cannot opt for such a scheme.
• Owning not more than ten goods carriage vehicles. It means that an assessee owning more than ten such vehicles cannot opt for such a scheme.
• From the financial year, 2018 – 2019, the following provision for the calculation of taxable income under section 44AE shall be applicable.
  • For light goods vehicle (less than the gross weight of 12MT) Rs. 7,500  per vehicle per month (part shall be considered full month).
  • For heavy goods vehicle (more than 12 MT gross weight) – Rs. One thousand per tonne per vehicle per month (part will be considered full month).

Ex, Mr. Khush owned 9 goods vehicles (other than heavy goods vehicles) throughout the year and, hence, income will be computed as follows:

Particulars	Amount (Rs.)
Income per month per goods vehicle	7,500
(×) No. of goods vehicles	9
Monthly income as per the provisions of section 44AE from 9 goods vehicles	67,500
No. of months in the year during which the vehicles were owned	12
Total income from business of plying, hiring or leasing goods carriages as per the provisions of section 44AE	8,10,000

Presumptive Taxation in ITR4 under section 44AE

The image below shows the ITR4 for section 44AE

Can higher or lower income be declared under presumptive taxation?

A person may voluntarily disclose his business income at rates more than those prescribed under section 44AD,44ADA & 44AE.

A person can declare his income at a rate lower than those prescribed under section 44AD,44ADA & 44AE .However, then he is required to maintain the books of account and has to get his accounts audited.

Benefits of disclosing Income under presumptive taxation scheme

Going for presumptive taxation is beneficial for small business as it is cost-effective and time-saving. Complex tax compliance procedure and bookkeeping can be avoided.

• No need to maintain books of accounts as prescribed under section 44AA or carry out Income Tax audit of accounts.
• Any person opting for the presumptive taxation scheme is liable to pay the whole amount of advance tax on or before 15 March of the previous year. So one need not pay due instalments of Advance tax on 15th June, 15th of September and 15th of December of the previous year, as applicable to other taxpayers not covered under this scheme.
• Income tax returns (ITRs) can be filed in simpler and shorter form ITR-4 (Sugam).

Deductions available under presumptive taxation scheme

Under the normal provisions of the Income-tax Act, taxable business/professional income will be computed after allowing deduction in respect of expenses which are deductible as per the Income-tax Act.

However, in the case of a person who is opting for the Presumptive Taxation Scheme, the presumptive income computed as per the prescribed rate is the final income and no further deductions/expenditure for business/profession/ income are allowed. The only exception is for partnership firm, claiming benefits of Presumptive Taxation Scheme under section 44AD the firm can claim deduction on account of remuneration and interest paid to partners as allowable under Income Tax Act.

No separate deduction on account of depreciation is available. However, the written down value of any asset used in such business shall be calculated as depreciation as per section 32 is claimed and has been actually allowed.

Example of deductions claimed for a Partnership firm under section 44AD

SM Corporation, a partnership firm, is running a Color Dying Press in its own premises. The turnover of the press during the previous year  was Rs. 84,48,848 and it declared
income as per the provisions of section 44AD. After computing the income @ 8% of such turnover of Rs. 84,48,848, the firm wants to claim further deduction on account of following
items:

• Salary paid to the accountant: Rs. 84,000
• Expenditure on account of insurance of press building: Rs. 25,200
• Depreciation on press building: Rs. 1,84,000
• Depreciation on the computer: Rs. 48,400
• Remuneration paid to its partners: 84,000
  Can the firm claim deduction on account of above expenditure?

As per the provisions of section 44AD, from the net income computed at the prescribed rate, i.e., @ 8% of turnover or gross receipts of the eligible business, an assessee is not permitted to claim any deduction under sections 30 to 38 (including depreciation or unabsorbed depreciation) from such income. Thus, in this case, the firm cannot claim any further
deduction on account of any of the above-discussed expenditure (except remuneration paid to its partners) from the net income computed as per the provisions of section 44AD.

In case of an assessee, being a partnership firm, from the net income computed as per the provisions of section 44AD, further deduction on account of remuneration and interest paid to its partners within the limit specified under section 40(b) is allowed. Thus, in this case the firm can claim further deduction on account of remuneration paid to its partners within the limit specified under section 40(b).

Example of deductions claimed for a Partnership firm under section 44AD

SM Corporation, a partnership firm is running a factory. The turnover of the firm during the previous year was Rs. 99,84,252 and it declared income as per the provisions of
section 44AD. The opening WDV of the block of depreciable asset (machinery @ 15%) as o was Rs. 8,25,252. Since the firm has opted for the provisions of section 44AD for
the year 2018-19 it has not claimed depreciation. In this case, if in the next year it does not opt for section 44AD, what will be the WDV on which the firm can claim depreciation?

As per the provisions of section 44AD, from the income computed as per the provisions of section 44AD, further deduction on account of depreciation is not available. However, the
WDV of any asset used in the business covered under the scheme of section 44AD shall be calculated as if depreciation as per section 32 is claimed and allowed. Thus, even though no
depreciation is claimed by the firm, yet for purpose of computation of the WDV of the asset, depreciation will be deducted from the value of the block. The WDV eligible for depreciation will be computed as follows:

Particulars	Amount(Rs)
Opening WDV	8,25,252
(-) Depreciation @ 15%	1,23,788
Closing WDV	7,01,464
WDV eligible for depreciation	7,01,464

Opting out of Presumptive Taxation Scheme

If you decide to opt for PTS  you have to file ITR under PTS for the next five years. You may opt-out of it before five years, but then you will not be allowed to re-opt for PTS for the next five years from the year in which you opted out.

For example, an assessee claims to be taxed

• on presumptive basis under Section 44AD for AY 2017-18. For AY 2018-19 and 2019-20 a
• However, for AY 2020-21, he did not opt for presumptive taxation Scheme.

In this case, he will not be eligible to claim the benefit of presumptive taxation scheme for next five AYs, i.e. from AY 2021-22 to 2025-26.
Further, he is required to keep and maintain books of account and he is also liable for tax audit as per section 44AB from the AY in which he opts out from the presumptive taxation scheme. [If his total income exceeds the maximum amount not chargeable to tax]

Who can file ITR4?

ITR 4 is to be filed by the individuals/HUF/ partnership firm whose total income includes Business income under section 44AD or 44AE or Income from profession calculated under section 44ADA and other types of Income given below.

• Salary/pension having income up to Rs 50 lakhs.
• Income from One House Property having income up to Rs 50 lakh (excluding the brought forward loss or loss to be carried forward cases under this head)
• Income from Other Sources having income up to Rs 50 lakh (Excluding winning from lottery and income from horse races).

Books required to be maintained

Specified books of account as per Rule 6F

• Cash book: A record of day to day cash receipts and payments which shows cash balance at the end of the day or at best at the end of each month and not later.
• A journal according to mercantile system of accounting: A journal is a log of all day to day transactions. It is a record, in accounting terms, where total credits equal total debits, when we follow the double entry system of accounting ie each debit has a corresponding credit and vice versa.
• A ledger where all entries flow from the journal, has details of all accounts, this can be used to prepare the financial statements.
• Photocopied of bills or receipts issued by you which are more than Rs 25
• Original bills of expenditure incurred by you which are more than Rs 50

Following are the additional requirements in case of a person carrying on the medical profession — physicians, surgeons, dentists, pathologists, radiologists, etc.

• Daily cash register with details of patients, services rendered, fees received and date of receipt
• Details of stock of drugs, medicines, and other consumables used

Video on How to fill ITR4

Video on How to fill ITR3

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