What is Presumptive Taxation Scheme?

Under presumptive taxation scheme, income is computed on the estimation basis. The main purpose of presumptive taxation scheme is to provide relief to the small taxpayers from maintaining proper books of account and to get these accounts audited.

Under Income Tax Act 1961, presumptive taxation schemes have been provided under sections 44AD, 44ADA and 44AE. Under presumptive taxation scheme it shall be deemed that all the deductions for expenses have been allowed.

Main Advantages of Presumptive Taxation

1. Assessee is not required to maintain proper books of account.
2. Assessee is not required to get his accounts audited by a Chartered Accountant.
3. Prime minister national relief funds.
4. National defense fund setup by central government.
5. Assessee is not required to pay advance tax in instalments; he has to pay all his advance tax on or before 15^th March of previous year.

Presumptive Taxation Under Section 44AD

Persons covered under presumptive taxation under section 44AD

A resident individual, resident HUF (Hindu Undivided Family) and resident partnership firm other than LLP (Limited liability partnership firm) can opt for presumptive taxation under section 44AD. But if the above-mentioned persons are claiming deduction under sections 10A, 10AA, 10B or under section 80HH to 80RRB or whose turnover exceeds Rs. 2 crore during the previous year then they cannot opt for presumptive taxation under section 44AD.

Under section 44AD income is computed at the rate of 8% of turnover (for cash transactions) or 6% of turnover (for digital transactions). Persons carrying on the following businesses cannot opt for presumptive taxation under this section:

1. Persons carrying on professions whose presumptive taxation is covered under section 44ADA.
2. Persons carrying on agency business.
3. Persons engaged in the business of plying, hiring or leasing goods carriages referred to in section 44AE.

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Computation of presumptive taxation under section 44AD

Example:

Mr. Sumit have turnover of Rs. 1.20 crores for FY 2020-21 and he has not maintained books of account. Mr. Sumit have opted for presumptive taxation under section 44AD. He has received Rs. 80 lakhs in cash and Rs. 40 lakhs through digital transactions in bank. Compute the income under the head PGBP?

Solution:

Income under the head PGBP:

Income for cash transactions under section 44AD = 80,00,000*8% = Rs. 6,40,000

Income for Digital transactions under section 44AD = 40,00,000*6% = Rs. 2,40,000

Total Income under PGBP Head = Rs. 8,80,000

Presumptive Taxation Under Section 44ADA

Persons covered under presumptive taxation under section 44ADA

A resident individual or a resident partnership firm (Other than LLP) whose total gross receipts do not exceed Rs. 50 lakhs and who are engaged in the following professions:

• Medical
• Legal
• Engineering 
• Architectural Profession
• Profession of Accountancy
• Technical Consultancy
• Interior Decoration

Can opt for presumptive taxation under section 44ADA.

Under section 44ADA income is computed at the rate of 50% of total gross receipts of the profession.

Computation of presumptive taxation under section 44ADA

Example:

Dr. Manoj is a medical practitioner. He has total gross receipts of Rs. 40 lakhs from this medical profession for FY 2020-21 and he has not maintained books of account. Dr. Manoj has opted for presumptive taxation under section 44ADA. Compute the income under the head PGBP?

Solution:

Income under the head PGBP:

Income under section 44ADA = 40,00,000*50% = Rs. 20,00,000

Presumptive Taxation Under Section 44AE

Any assessee engaged in the business of plying, hiring or leasing goods carriages and who have maximum 10 goods carriages in his name at any time during the previous year can opt for presumptive taxation under section 44AE.

Income under section 44AE will be computed in the following manner:

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Computation of presumptive taxation under section 44AE

Example:

Mr. Suresh is in transportation business. During FY 2020-21 he owns 6 heavy goods vehicles having capacity of 15 ton each and he 2 light goods vehicles having capacity of 10 ton each for 10 months. He has not maintained books of account. Mr. Suresh has opted for presumptive taxation under section 44AE. Compute the income under the head PGBP?

Solution:

Income under the head PGBP:

Income under section 44AE for heavy goods vehicle = 6 vehicles *15 ton*1000*12 months= Rs. 10,80,000

Income under section 44AE for light goods vehicle = 2 vehicles *7500*10 months= Rs. 1,50,000

Total Income under section 44AE = Rs. 12,30,000