How to Save on Taxes with Presumptive Taxation: Sections 44AD, 44ADA, and 44AE Demystified
With the endless provisions, the criteria, conditions and the implications that are complex to understand, meeting with tax compliances is challenging. The government has introduced the presumptive taxation schemes in the Income Tax Act, 1961 to simply the tax process, reduce the burden of compliance and offer relief to the tax payers by allowing them to declare income at a predetermined rate. In this blog we’ll get into the details of the different presumptive taxation schemes in place and how it can help you streamline your tax planning.
?
Section 44AD - Presumptive Scheme for Businesses
The government has introduced the presumptive taxation scheme under section 44AD to give relief to small taxpayers having business income. Taxpayers engaged in any business other than plying, hiring and leasing referred to in section 44AE of the Act. Taxpayers who have professional income can opt for presumptive scheme as referred to in Section 44ADA.
Latest Update
The Budget 2023 amended Sec 44AD and Sec 44ADA and revised presumptive taxation limits for FY 2023-24 (AY 2024-25) as follows:
The increase in limits is subject to a condition that cash receipts shall not exceed 5% of the total receipts.
?
Who is Eligible to Opt for Presumptive Taxation Under Section 44AD?
? "Eligible assessee"
·???????? Resident individual,
·??????? Hindu undivided family or a partnership firm (except LLP)
? "Eligible business" means
·??????? any business except the business of plying, hiring or leasing goods carriages referred to in section 44AE; and
·??????? whose total turnover or gross receipts in the previous year does not exceed an amount of two crore rupees/Three Crore (The increase in limits is subject to a condition that cash receipts shall not exceed 5% of the total receipts)
?
Conditions for Section 44AD
You stand to lose presumptive tax benefits, if you do not continue them for at least 5 years.
Details of the additional condition
This additional condition has been added by substituting sub-section (4) of 44AD which is
If you are opting for the presumptive scheme, you must-
a.???? Declare your profits as per the presumptive scheme for at least 5 Assessment years in continuation.
b.???? Assessee will lose presumptive benefits if he file profit as per regular business before the end of 5 years and disallowed from presumptive taxation for the subsequent 5 Assessment years.
So, if you opt for a presumptive scheme, continue for 5 years and if you want to opt-out, you’ll be barred from resuming with the presumptive scheme for a period of 5 years.
?
Features of the presumptive scheme
a.???? Eligibility: Section 44AD is applicable to resident individual, HUF and partnership (excluding LLP)
b.???? Turnover Limit: Turnover must be less than Rs. 3 Crore (if 95% of the receipts are through online modes) or Rs. 2 Crore (if 95% of receipts are not through online modes).
c.????? Presumptive income: Minimum net income should be 8% of your turnover (the minimum net income should be considered 6% in the case of digital receipts).
d.???? No Expense deductions: Business cannot claim any further deductions or expenses beyond the presumptive income.
e.????? No Audit requirement: Business opting for 44AD are not required to maintain detailed books of accounts or get audited.
?
New Condition (Section 44AD (4) Analysis): Restrictions for Opting Presumptive Scheme
If an Assessee cannot opt for Presumptive income scheme because of any reasons other than the restriction give under section 44AD (4) “that the taxpayer couldn’t opt for the presumptive income scheme for five years if he declares the profits lower than 8% or 6%”, then restrictions of Section 44AD (4) do not apply.
?
Section 44ADA – Presumptive Tax Scheme for Professionals
What is Section 44ADA of the Income Tax Act?
Section 44ADA is a special provision for calculating the taxable income for small professionals in certain circumstances.
Section 44ADA was introduced to extend the scheme of simplified presumptive taxation to specified professionals. Earlier, the presumptive scheme of tax was available only to small businesses.
The presumptive scheme of taxation reduces the compliance burden on small professions and facilitates ease of doing business. Under the presumptive scheme of taxation, profits/taxable income is presumed at 50% of the gross receipts.
Assessees Eligible for Section 44ADA
The following assessees are eligible for Section 44ADA:
·???????? Individuals
·???????? Partnership firms (note that limited liability partnerships are not eligible to opt for Section 44ADA)
?
Presumptive Income Calculation under Section 44ADA of Income Tax
The following conditions must be met to opt for presumptive taxation scheme under Section 44ADA of the Income Tax Act:
·???????? The profession's gross receipts should be less than or equivalent to INR 50 lakh.?
·???????? The limit is increased to INR 75 lakhs if the total amount received in cash does not exceed 5 percent of the total gross receipts of such previous year.
·???????? In the ITR, the taxpayer must record 50% or more of the gross receipts as taxable income.
?
Examples for Presumptive Scheme for Professionals under section 44ADA
if your gross receipts for the year 2023-24 amount to Rs. 5,00,000 then your presumptive income shall be Rs. 2,50,000 i.e. 50% of Rs. 5,00,000.
?
Benefits of Section 44ADA
By following Section 44ADA, an assessee would get the following benefits:
·???????? No need to maintain books required under?Section 44AA
·???????? No requirement to have accounts audited under?Section 44AB
However, if you declare profit less than 50%, and your income exceeds the basic exemption limit, then you may be required to maintain the books of accounts u/s 44AA and to get your accounts audited u/s 44AB
?
Implications of Choosing Section 44ADA
All deductions for business expenses are deemed to have been allowed. Once profits are taxed at 50% of the gross receipts, the balance of 50% is deemed to be allowed towards all the business expenses of the assessee.?
?
?
Section 44AE of Income Tax Act - Presumptive Taxation for Transporters
?
Applicability of Section 44AE
·???????? Assessee who owns not more than ten goods carriages at any time during the previous year and
·???????? who is engaged in the business of plying, hiring or leasing such goods carriages,
?
Assessee such as partnership firms, individuals, HUFs, etc., can also apply for this scheme. Thus, businesspeople engaged in passenger transport with or have more than ten vehicles at any time within the last financial year will not be eligible for this scheme.
?
How to Calculate Presumptive Income Under Section 44AE?
If you fulfil the eligibility criteria, you can opt for Presumptive taxation under Section 44AE. Take a look at your income calculation procedure under the scheme:
For Example, if you are engaged in the business of plying, hiring, or leasing of goods carriage, and you own 6 vehicles throughout the year, then your income u/s 44AE shall amount to Rs. 5,40,000/- (i.e., Rs. 7500 x 6 vehicles x 12 months).
?
What are the Exceptions under Section 44AE?
According to Sections 44AE of the Income-tax Act, you cannot claim any deduction allowed under sections 30 to 38, if you have opted for Presumptive Taxation. The exemptions and deductions are available under Sections 80C to 80U. In the case of Section 44AE, Gross taxable income is the income calculation at a rate of Rs 7,500 for each vehicle per month.
?
On the other hand, partnership firms can claim deductions for the interest and salary paid to the partners. It is important to note that you cannot avail deduction for depreciation under Presumptive Taxation. In this case, you can calculate the written-down price of a business asset after assuming the depreciation claim under Section 32 of the Income Tax Act.
?
If your business comes under Section 44AE’s limits, you no longer need to keep account books or confirm its requirements. On the other hand, if you have opted for Presumptive Taxation, you need to pay tax in advance like other taxpayers.
?
It is important to understand the provisions of Section 44AD, 44ADA and 44AE for small businesses, professionals and transporters as they can significantly impact on the tax implications. To ensure compliance with the provisions and conditions, the eligibility criteria, correct income calculations for the purpose of reporting to the tax authorities requires assistance of an expert. Water and Shark can assist you with tax planning, understanding the latest amendments, or fulfilling reporting requirements. Our team of tax experts can guide you with the benefits of presumptive taxation. Contact us today to help you with the streamlined tax compliance.
?