In order to give relief to small taxpayers from the rigmarole of maintenance of books of account and also from getting them audited, the Income-tax (I-T) Act gives the option of presumptive taxation scheme.
This scheme is sub-divided into three parts, one each for the small-scale businesses, specified professionals, and businesses running goods carriages. Income tax payers who want to opt for presumptive taxation need to consider the following points:
First and foremost, the income computed under this scheme is the final income and no further expenses are allowed.
Second, tax payers need not maintain accounts under these provisions.
Third: If a taxpayer opts for presumptive taxation scheme, then he is also required to follow the same scheme for next five years. If s/he failed to do so, then presumptive taxation scheme will not be available for him for next 5 years.
How it works?
A taxpayer can adopt the presumptive taxation scheme and declare income at a prescribed rate. In return, s/he does not need to maintain books of account or to get them audited.
There are three different provisions of presumptive taxation:
1. Small taxpayers: The presumptive taxation scheme of section 44AD is designed to give relief to small taxpayers engaged in any business. It can be followed by resident individual, resident Hindu Undivided family (HUF) and resident partnership firm.
It is vital to note that a person who is earning income in the nature of commission or brokerage cannot adopt the presumptive taxation scheme.
Also, a person whose total turnover or gross receipts for the year exceed ₹3 crore can’t adopt the presumptive taxation scheme of section 44AD. Earlier this limit was ₹2 crore, but in the Budget 2023, this was raised to the new limit.
The taxpayers opting for the presumptive taxation scheme under section 44AD are liable to pay whole amount of advance tax on or before March 15 of the previous year.
2. Specified professionals: The scheme under section 44ADA is meant to give relief to small taxpayers engaged in specified profession which include legal, medical, engineering, accountancy, technical consultancy, interior decoration and any other profession notified by CBDT.
The presumptive income is computed at the rate of 50 percent, which is considered the final income and after this, no further expenses are permitted. This option is available for the professionals whose income is less than ₹75 lakh per annum. Earlier the limit was ₹50 lakh but it was recently raised ₹75 lakh in the Budget 2023.
Taxpayers opting for the presumptive taxation scheme under section 44ADA are supposed to pay whole amount of advance tax on or before March 15 of the previous year.
3. For the business of goods carriages: The scheme under section 44AE is designed to give relief to small taxpayers 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.
In conclusion, small scale business persons across the categories and professionals are given the option of presumptive taxation under which they can declare their income based on a guess work and pay advance tax accordingly. As a result, they do not need to maintain accounts or to get them audited.
But to be able to avail this facility, their gross income threshold should be lower than ₹3 crore for businesses, and ₹75 lakh for professionals.