Presumptive taxation U/s. 44AD, 44AE & 44AF with FAQs

Sections 44AD, 44AE and 44 AF cover special provisions of computing profits on a presumptive basis. All the schemes are optional at the discretion of the assessee. Conditions and manner of computation common to all three sections are given at the end after specific provisions applying to each section.

A. Section 44AD – Presumptive computation of profits for taxation for business

(Provisions as Applicable from A.Y. 2011-12, the old provisions pertaining to Section 44AD will continue to apply till March 2010)

1] Applies to:

Any eligible assessee engaged in an eligible business. Eligible assessee is defined as an individual, HUF, resident partnership firm, but excludes an LLP under the LLP Act, 2008 and any assessee who has claimed a deduction under sections 10A, 10AA, 10B, 10BA or heading C of Chapter VIA (sections 80I-A, 80-IB, etc.). An eligible business means any business other than the business of plying, hiring, or leasing of goods carriage as given in section 44AE and whose turnover/gross receipt in the previous year does not exceed Rs. 60,00,000 in A.Y. 2011-12 and 2012-13 and Rs. 1,00,00,000 in AY 2013-14 or in Year Succeeding the AY 2013-14.

2] Deemed Income:

8% of the total turnover or gross receipts of the assessee on account of such business or any higher amount voluntarily declared by him shall be deemed to be his income chargeable to tax.

Refer to ‘A] Conditions’ and ‘B] Computation’ below.

Provisions of Chapter XVII C relating to Advance Payment of taxes will not apply to the eligible assessee in respect of eligible business only.

C. Section 44AE – Business of plying, leasing or hiring trucks

(Applicable till A.Y. 2010-11, this section is amended from A.Y. 2011-12 details of which are given in paragraph D)

1] Applies to:

Any person engaged in the business of plying, leasing or hiring of trucks if he owns not more than 10 goods carriages at any time during the previous year including those taken on hire purchase or on instalments. This scheme does not apply to those who operate trucks on hire without owning them (Circular 684, dt. 10-6-1994)

2] Income:

*Type of Goods Carriage*	*Estimated Income*
Heavy Goods Vehicle	Rs. 3,500 for every month (or part of a month) during which the goods carriage is owned by the taxpayer.
Other than Heavy goods vehicle	Rs. 3,150 for every month (or part of a month) during which the goods carriage is owned by the tax-payer.

Refer to ‘A] Conditions’ and ‘B] Computation’ below.

D. Business of plying, leasing or hiring trucks – Section 44AE

(Applicable from A.Y. 2011-12, the old provisions pertaining to Section 44AE will continue to apply till March 2010)

1] Applies to:

2] Deemed Income:

*Type of Goods Carriage*	*Estimated Income*
Heavy Goods Vehicle	Higher of Rs. 5,000 for every month (or part of a month) during which the goods carriage is owned by the tax-payer or an amount actually earned from such vehicle.
Other than Heavy goods vehicle	Higher of Rs. 4,500 for every month (or part of a month) during which the goods carriage is owned by the tax-payer or an amount actually earned from such vehicle.

Refer to ‘A] Conditions’ and ‘B] Computation’ below.

E. Section 44AF – Business of retail trading of goods

(Applicable till A.Y. 2010-11, this section will become inoperative from AY 2011-12 and the retail traders can choose to be governed by section 44AD from A.Y. 2011-12 which requires presumptive income at 8% of gross receipts/turnover)

1] Applies to:

Any person engaged in the business of retail trade in any goods or merchandise shall be covered by this provision. If his turnover from the above business do not exceed Rs. 40 lakhs.

2] Deemed Income:

5% of the total turnover of such person or a higher sum voluntarily declared by him shall be deemed to be his income from such business.

Refer to ‘A] Conditions’ and ‘B] Computation’ below.

Common Conditions and Computation method:

A. Conditions:

All deductions u/s. 30 to 38 including depreciation deemed to be allowed. No further deduction allowed under those sections.

The written down value of asset used in the business will be computed as if depreciation, as applicable, was allowed.

It will be assumed that disallowances if any u/ss. 40, 40A and 43B were considered by calculating the income estimated in 2] above.

In the case of a firm, the deduction in respect of salary and interest to partners u/s. 40(b) will be allowed.

In respect of this business the assessee is not required to maintain books of account as per the provisions of s. 44AA.

The assessee is not required to get the books of account audited u/s. 44AB in respect of the above business.

If the assessee wants to declare lower income than the deemed profits as calculated above, he will have to maintain the books of account as per s. 44AA and get the accounts audited as per s. 44AB irrespective of turnover if his total income exceeds basic exemption limit.

B. Computation:

The income calculated above shall be aggregated with income from any other business or other heads of income under the other provisions of the Income-tax Act.

The brought forward business losses and other losses will be deducted.

All deductions u/ss. 80CCC to 80U shall be allowed

NOTE:

1. The profit and loss from related businesses covered by sections 44B, 44BB, 44BBA, 44BBB, namely Shipping business in case of non-residents, Business of exploration, etc. of mineral oils, Operation of aircraft in case of non-residents, Foreign companies engaged in the business of civil construction, etc., in certain turnkey projects are not covered here as they have lower relevance and usage.

2. Year wise limit for section 44AB tax audit from financial year 2009-10 is given here under .

SR N0	FINANCIAL YEAR	LIMIT (BUSINESS)	PROFESSIONAL
1	2009-10	40 LAKH	10 LAKH
2	2010-11,2011-12	60 LAKH	15 LAKH
3	2012-13 ONWARDS	100 LAKH	25 LAKH

FAQs on Tax on Presumptive Taxation Scheme

What is the meaning of presumptive taxation scheme?

As per the Income-tax Law, a person engaged in business is required to maintain regular books of account and further, he has to get his accounts audited. To give relief to small taxpayers from this tedious work, the Income-tax Law has framed the presumptive taxation scheme under sections 44AD and 44AE.

A person adopting the presumptive taxation scheme can declare income at a prescribed rate and, in turn, is relieved from tedious job of maintenance of books of account and also from getting the accounts audited.

For small taxpayers the Income-tax Law has framed two presumptive taxation schemes as given below:

1) The presumptive taxation scheme of section 44AD.

2) The presumptive taxation scheme of sections 44AE.

For whom the presumptive taxation scheme of section 44AD is designed?

The presumptive taxation scheme of section 44AD is designed to give relief to small taxpayers engaged in any business (except the business of plying, hiring or leasing goods carriages referred to in sections 44AE).

Who is eligible to take advantage of the presumptive taxation scheme of section 44AD?

The presumptive taxation scheme of section 44AD can be adopted by following persons :

1) Resident Individual

2) Resident Hindu Undivided Family

3) Resident Partnership Firm (not Limited Liability Partnership Firm)

In other words, the scheme cannot be adopted by a non-resident and by any person other than an individual, a HUF or a partnership firm (not Limited Liability Partnership Firm).

These provisions cannot be adopted by a person who has made any claim towards deductions under section 10A/ 10AA/10B/ 10BA or under sections 80HH to 80RRB in the relevant year.

Which businesses are not eligible for presumptive taxation scheme?

The scheme of section 44ADD is designed to give relief to small taxpayers engaged in any business, except the following businesses:

·Business of plying, hiring or leasing goods carriages referred to in sections 44AE.

·A person who is carrying on any agency business.

·A person who is earning income in the nature of commission or brokerage

Apart from above discussed businesses, a person carrying on profession as referred to in section 44AA(1) is not eligible for presumptive taxation scheme.

Can an insurance agent adopt the presumptive taxation scheme of section 44AD?

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.

Can a person engaged in a profession as prescribed under section 44AA(1) adopt the presumptive taxation scheme of section 44AD?

A person who is engaged in any profession as prescribed under section 44AA(1) cannot adopt the presumptive taxation scheme of section 44AD.

 Can a person whose total turnover or gross receipts for the year exceed Rs. 1,00,00,000 adopt the presumptive taxation scheme of section 44AD?

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 of audit prescribed under section 44AB (i.e., Rs. 1,00,00,000). In other words, if the total turnover or gross receipt of the business exceeds Rs. 1,00,00,000 then the scheme of section 44AD cannot be adopted.

What is the manner of computation of taxable business income under the normal provisions of the Income-tax Law, i.e., in case of a person not adopting the presumptive taxation scheme of section 44AD?

Generally, as per the Income-tax Law, the taxable business income of every person is computed as follows :

*Particulars*	*Amount*
Turnover or gross receipts from the business	XXXXX
Less : Expenses incurred in relation to earning of the income	(XXXXX)
Taxable Business Income	XXXXX

For the purpose of computing taxable business income in the above manner, the taxpayers have to maintain books of account of the business and income will be computed on the basis of the information revealed in the books of account

 What is the manner of computation of taxable business income in case of a person adopting the presumptive taxation scheme of section 44AD?

In case of a person adopting the provisions of section 44AD, income will be computed on presumptive basis, i.e., @ 8% of the turnover or gross receipts of the eligible business for the year.

In other words, in case of a person adopting the provisions of section 44AD , income will not be computed in normal manner as discussed in previous FAQ (i.e., Turnover less Expense) but will be computed @ 8% of the turnover.

Income at higher rate, i.e., higher than 8% can be declared if the actual income is higher than 8%.

As per the presumptive taxation scheme of section 44AD, income of a taxpayer will be computed @ 8% of the turnover or gross receipt and from the income of 8% can the taxpayer claim any further deductions?

Under the normal provisions of the Income-tax Law, taxable business income will be computed after allowing deduction in respect of expenses which are deductible as per the Income-tax Law and after disallowing expenses which are not deductible as per the Income-tax Law.

In case of a person who is opting for the presumptive taxation scheme of section 44AD, the provisions of allowance/disallowances as provided under the Income-tax Law will not apply and income computed at the presumptive rate of 8% will be the final taxable income of the business covered under the presumptive taxation scheme. In other words, the income computed @ 8% will be the final taxable income of the business covered under the presumptive taxation scheme and no further expenses will be allowed or disallowed.

However, in case of a taxpayer being a partnership firm opting for the presumptive taxation scheme, from the income computed @ 8% of the turnover further deduction can be claimed on account of remuneration and interest paid to partners (computed as per the Income-tax Law).

While computing income as per the provisions of 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.

 If a person adopts the presumptive taxation scheme of section 44AD, then is he required to maintain books of account as per section 44AA?

section 44AA deals with provisions relating to maintenance of books of account by a person engaged in business/profession. Thus, a person engaged in business/profession has to maintain books of account of his business/profession according to the provisions of section 44AA.

In case of a person engaged in a business and opting for the presumptive taxation scheme of section 44AD, the provisions of section 44AA relating to maintenance of books of account will not apply. In other words, if a person adopts the provisions of section 44AD and declares income @ 8% of the turnover, then he is not required to maintain the books of account as provided under section 44AA in respect of business covered under the presumptive taxation scheme of section 44AD . Apart from giving relief from maintenance of books of account, the scheme also relieves the taxpayer from the audit of the books of account.

 If a person adopts the presumptive taxation scheme of section 44AD, then is he liable to pay advance tax in respect of income from business covered under section 44AD?

A person opting for the presumptive taxation scheme of section 44AD will not be liable to pay advance tax in respect of income from business covered under section 44AD.

 What provisions will apply if a person does not opt for the presumptive taxation scheme of section 44AD and declares his income at a lower rate (i.e. less than 8%)?

A person can declare income at lower rate (i.e., less than 8%), however, if he does so, and his income exceeds the maximum amount which is not chargeable to tax, then he is required to maintain the books of account as per the provisions of section 44AA and has to get his accounts audited.

For whom the presumptive taxation scheme of section 44AE is designed?

The scheme of sections 44AE is designed to give relief to small taxpayers engaged in the business of plying, hiring or leasing goods carriages.

 Who is eligible to take advantage of the presumptive taxation scheme of section 44AE and which business is eligible for the presumptive taxation scheme of section 44AE?

The provisions of sections 44AE are applicable to every person (i.e., an individual, HUF, firm, company, etc.).

The presumptive taxation scheme of sections 44AE can be adopted by a person who is engaged in the business of plying, hiring or leasing goods carriages and who does not own more than 10 goods vehicles at any time during the year.

Can a person who owns more than 10 goods vehicles adopt the presumptive taxation scheme of section 44AE?

The important criterion of the scheme is the restriction of owning of not more than 10 goods vehicles at any time during the year. Thus, if a person owns more than 10 goods vehicles at any time during the year, then he cannot take advantage of this scheme.

 What is the manner of computation of taxable business income in case of a person adopting the presumptive taxation scheme of section 44AE?

In case of a person who is willing to opt for the presumptive taxation scheme of sections 44AE, income will be computed on an estimated basis. The rate of computation of income is different for heavy goods vehicles and other than heavy goods vehicles. The rates are as follows:

In respect of heavy goods vehicle (*) income will be computed @ Rs. 5,000 per month or part thereof during which the heavy goods vehicle is owned by the taxpayer, during the year.

(*) “Heavy goods vehicle” means any goods carriage the gross vehicle weight of which, or a tractor or a road-roller the unladen weight of either of which, exceeds 12,000 kilograms.

In case of any other goods vehicle (i.e., other than heavy goods vehicle) income will be computed @ Rs. 4,500 per month or part thereof during which the goods vehicle is owned by the taxpayer during the year.

Note: If the actual income is higher, than the presumptive rate, i.e., higher than Rs. 5,000/Rs.4,500, then such higher income can be declared.

Note: Part of the month would be considered as full month.

Illustration for better understanding

Mr. Khush is engaged in the business of plying, hiring or leasing goods carriage. Throughout the year 2013-14 he owned 9 goods vehicle (5 heavy goods vehicle and 4 other than heavy goods vehicle). What will be the taxable income from the business of plying, hiring or leasing goods carriages if he adopts the provisions of sections 44AE?

As per the provisions of sections 44AE, in respect of heavy goods vehicle income will be computed @ Rs. 5,000 per month or part thereof during which the heavy goods vehicle is owned by the taxpayer during the year. In respect of other goods vehicle (other than heavy goods vehicle) income will be computed @ Rs. 4,500 per month or part thereof during which the goods vehicle (other than heavy goods vehicle) is owned by the taxpayer during the year.

In the present case Mr. Khush owned 5 heavy goods vehicle and 4 other goods vehicle (i.e. other than heavy goods vehicle) throughout the year and hence income will be computed as follows:

*Particulars*	*Rs.*
Income from heavy goods vehicle
Income per month per heavy goods vehicle	5,000
(×) No. of heavy goods vehicle	5
Monthly income as per the provisions of sections 44AE from 5 heavy goods vehicle	25,000
(×) No. of months in the year during which the vehicle was owned	12
Total income as per the provisions of sections 44AE from 5 heavy goods vehicle(A)	3,00,000
Income from other goods vehicle (i.e. other than heavy goods vehicle)
Income per month per vehicle (i.e. other than heavy goods vehicle)	4,500
(×) No. of vehicle	4
Monthly income as per the provisions of sections 44AE from 4 other goods vehicle (i.e. other than heavy goods vehicle)	18,000
(×) No. of months in the year during which the vehicle was owned	12
Total income as per the provisions of sections 44AE from 4 other goods vehicle (i.e. other than heavy goods vehicle) *(B)*	2,16,000
Total income from business of plying, hiring or leasing goods carriages as per the provisions of sections 44AE *(A + B)*	5,16,000

As per the presumptive taxation scheme of section 44AE, income of a taxpayer will be computed at the rate of Rs. 4,500/Rs. 5,000 per goods vehicle per month and in such a case can the taxpayer claim any further deductions from the presumptive income declared at the prescribed rate?

In case of a person who is opting for the presumptive taxation scheme of sections 44AE, the provisions of allowance/disallowances as provided under the Income-tax Law, will not apply and income computed at the presumptive rate of Rs. 4,500/Rs. 5,000 per goods vehicle per month will be the final income. In other words, the income computed at the rate of Rs. 4,500/Rs. 5,000 per goods vehicle per month will be the final taxable income of the business and no further expenses will be allowed or disallowed.

However, in case of a taxpayer, being a partnership firm, opting for the presumptive taxation scheme, from the income computed at the rate of Rs. 4,500/Rs. 5,000 per goods vehicle per month, further deduction can be claimed on account of remuneration and interest paid to partners (computed as per the Income-tax Law).

While computing income as per the provisions of sections 44AE, 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.

 If a person adopts the presumptive taxation scheme of section 44AE, then is he required to maintain books of account as per section 44AA?

section 44AA of the Income-tax Act, 1961 has provisions relating to maintenance of books of account by a person engaged in business/profession. Thus, a person engaged in business/profession has to maintain books of account of his business according to the provisions of section 44AA.

In case of a person opting for the presumptive taxation scheme of section 44AE, the provisions of section 44AA relating to maintenance of books of account will not apply. In other words, if a person adopts the provisions of section 44AE and declares his income at the rate of Rs. 4,500/Rs. 5,000 per goods vehicle per month, then he is not required to maintain the books of account as provided under section 44AA in respect of business covered under the presumptive taxation scheme of section 44AE. Apart from giving relief from maintenance of books of account, the scheme also relieves the taxpayer from audit of books of account under section 44AB.

 If a person adopts the presumptive taxation scheme of section 44AE, then is he liable to pay advance tax in respect of income from business covered under section 44AE?

There is no concession as regards payment of advance tax in case of a person who is adopting the presumptive taxation scheme of section 44AE and, hence, he will be liable to pay advance tax even if he adopts the presumptive taxation scheme of section 44AE.

What provisions will apply if a person does not opt for the presumptive taxation scheme of section 44AE and declares his income at a lower rate?

A person can declare his income at lower rate (i.e., less than Rs. 4,500/Rs. 5,000 per goods vehicle per month). However, if he does so, then he is required to maintain the books of account as per the provisions of section 44AA and has to get his accounts audited under section 44AB.

Source from- Incometaxindia Website

FAQs on Tax on Presumptive Taxation Scheme

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