Benefits of Presumptive Taxation Scheme

Benefits of Presumptive Taxation Scheme

The presumptive taxation scheme of section 44AD is designed to give relief to small taxpayers engaged in any business (e.g retail trading or wholesale trading or civil construction or any other business) however Income Tax Act has specified few business and profession who cannot file under this category

Businesses not covered under the presumptive taxation scheme of section 44AD :- 

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

  • Business of plying, hiring or leasing of goods carriages referred to in section 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, Profession Listed below.             
    • Legal 
    • Medical 
    • Engineering  
    • Architectural profession 
    • Profession of accountancy or 
    • Technical consultancy
    • Interior decoration or any other profession a
    • Authorised representatives, 
    • Film Artists, 
    • Company Secretaries and 
    • Profession of Information and Technology 
    • Computation of Taxable Income under Section 44AD

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

As per the provisions of this section, an eligible assessee undertaking an eligible business as referred above has an option to offer 8% of his total gross turnover of the year as net profits for the year for tax purposes. Once this option is chosen, the assess is not allowed to claim any further deductions of business expenses (actual or notional) from the arrived 8% . Tax as per applicable slab rates is then to be applied to such deemed income to arrive at the net tax payable. 

If you choose to not opt for this scheme and if in actual you have made profit lesser than 8% and do not wish to opt for this scheme, you are required to get your books of accounts audited by a CA. 

E.g. You are running a business of running a Beauty Parlour and have earned total fees of Rs. 10lacs during the year. Once you choose to opt for the benefits of this provision, you are only required to indicate the total turnover (10lacs in this case) and calculate 8% of it i.e 80000 as your net profit from this business and pay tax at applicable normal slab rates. However, once you have chosen this scheme, you do not have the option to claim other business expenses such as rent, utility bills ,etc.

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

  • Resident Individual
  • Resident Hindu Undivided Family
  • Resident Partnership Firm (not Limited Liability Partnership Firm)

Small businesses have liked the scheme and have been filing tax under this. If you are a small business and want to file your return, click here to get started