What is Presumptive Taxation?
Presumptive taxation is a simplified tax compliance scheme designed for small taxpayers to reduce their compliance burden. Under this scheme, income is computed on a presumptive basis at prescribed rates without requiring the taxpayer to maintain detailed books of accounts or get them audited.
Key Features of Presumptive Taxation
- • Income calculated at prescribed rates on gross receipts/turnover
- • No requirement to maintain detailed books of accounts
- • No tax audit required under Section 44AB
- • Simplified ITR filing (ITR-4 Sugam)
- • Advance tax payable in single installment by March 15
- • Available to residents only (individuals, HUFs, partnership firms)
The scheme is governed by three sections of the Income Tax Act: Section 44AD for small businesses, Section 44ADA for professionals, and Section 44AE for goods carriage operators.
Section 44AD - For Small Businesses
Section 44AD is designed for small businesses with turnover up to ₹3 crores, allowing them to declare income at a prescribed percentage of their total turnover.
Deemed Income Rates
| Type of Receipt | Deemed Income Rate |
|---|---|
| Cash receipts (cash/cheque/DD) | 8% of turnover |
| Digital receipts (NEFT/RTGS/UPI/Cards) | 6% of turnover |
Eligibility Criteria
- • Turnover Limit: Total turnover/gross receipts should not exceed ₹3 crores in a financial year
- • Resident Status: Assessee must be a Resident Indian
- • Entity Type: Individual, HUF, or Partnership Firm (not LLP)
- • Business Type: Any business except specified excluded businesses
Example Calculation
Mr. Sharma's Business:
- • Total turnover: ₹1,00,00,000
- • Cash receipts: ₹40,00,000 (40%)
- • Digital receipts: ₹60,00,000 (60%)
Deemed Income Calculation:
- • 8% of ₹40,00,000 = ₹3,20,000
- • 6% of ₹60,00,000 = ₹3,60,000
- • Total Deemed Income = ₹6,80,000
Section 44ADA - For Professionals
Section 44ADA provides a simplified taxation scheme for professionals with gross receipts up to ₹75 lakhs. Professionals can declare 50% of their gross receipts as income.
Specified Professions
Legal
Medical
Engineering
Architecture
Accountancy
Technical Consultancy
Interior Decoration
Film Artists
Company Secretary
Information Technology
Authorized Representative
Key Features
- • Receipts Limit: Gross receipts should not exceed ₹75 lakhs
- • Deemed Income: 50% of total gross receipts
- • Applicable to: Individuals, HUFs, Partnership Firms (not companies/LLPs)
- • Resident Status: Assessee must be Resident in India
Example Calculation
Dr. Patel's Medical Practice:
- • Total gross receipts: ₹60,00,000
- • Expenses actually incurred: ₹25,00,000
Under Normal Provisions:
Taxable Income = ₹60,00,000 - ₹25,00,000 = ₹35,00,000
Under Section 44ADA:
Deemed Income = 50% of ₹60,00,000 = ₹30,00,000
Section 44AE - For Goods Carriage Operators
Section 44AE provides a special presumptive taxation scheme for taxpayers engaged in the business of plying, hiring, or leasing goods carriages. Income is deemed based on the number of vehicles owned.
Deemed Income Per Vehicle
| Vehicle Type | Deemed Income Per Month |
|---|---|
| Goods carriage (other than heavy goods vehicle) | ₹7,500 per vehicle per month |
| Heavy goods vehicle (HGV) - More than 12 MT GVM | ₹1,000 per ton per vehicle per month |
Key Features
- • Vehicle Limit: Scheme available regardless of number of vehicles
- • Period: Income calculated for the period the vehicle is owned
- • No Expense Deduction: All expenses deemed covered in the prescribed amount
- • Depreciation: WDV of asset calculated as if depreciation claimed
Example Calculation
Mr. Kumar - Transport Business:
- • Light goods vehicles: 3 (owned for full year)
- • Heavy goods vehicles (15 MT): 2 (owned for 6 months)
Deemed Income Calculation:
- • Light vehicles: 3 × ₹7,500 × 12 = ₹2,70,000
- • Heavy vehicles: 2 × (15 × ₹1,000) × 6 = ₹1,80,000
- • Total Deemed Income = ₹4,50,000
Who is Eligible?
Eligible Assessees
- • Resident Individuals
- • Hindu Undivided Families (HUFs)
- • Partnership Firms (not LLPs)
- • Resident taxpayers only
Turnover/Receipt Limits
- • Section 44AD: Up to ₹3 crores
- • Section 44ADA: Up to ₹75 lakhs
- • Section 44AE: No limit
Who is NOT Eligible?
Businesses NOT Covered under Section 44AD
- • Persons carrying on profession as specified under Section 44AA(1)
- • Persons earning income in the nature of commission or brokerage
- • Persons carrying on agency business
- • Persons who have claimed deductions under Sections 10A, 10AA, 10B, 10BA
- • Limited Liability Partnerships (LLPs)
- • Companies
- • AOP/BOI
- • Co-operative societies
5-Year Lock-in Rule
If a taxpayer opts for presumptive taxation under Section 44AD and subsequently opts out in any of the next 5 assessment years, they cannot opt for presumptive taxation again for the next 5 years from the year of opting out. Additionally, tax audit becomes mandatory for those 5 years.
Benefits of Presumptive Taxation
Reduced Compliance Burden
- • No need to maintain books of accounts
- • No tax audit required
- • Simplified ITR-4 form
- • Less documentation
Tax Benefits
- • Single advance tax payment by March 15
- • Lower tax incidence (6% rate for digital)
- • No disallowance of expenses
- • Simplified calculation
Business Benefits
- • Freedom from complex accounting
- • More time for business operations
- • Reduced professional fees
- • Certainty in tax liability
Flexibility
- • Can declare higher income than deemed
- • Option to opt out (with consequences)
- • Applicable to multiple businesses
- • Seamless transition between years
Compliance Requirements
Advance Tax
- • Due Date: Entire advance tax due by March 15 of the financial year
- • 100% of tax must be paid by this date
- • No need to pay in 4 quarterly installments like other taxpayers
- • Delay attracts interest under Section 234C
Income Tax Return
- • File ITR-4 (Sugam) form
- • Due date: July 31 (unless tax audit applicable)
- • Declare gross receipts/turnover
- • Declare deemed income (or higher amount)
Records to Maintain
While detailed books are not required, maintain:
- • Bank statements
- • Invoices/bills of sales
- • Purchase receipts
- • Asset details (for depreciation)
Frequently Asked Questions
Q: Can I declare income higher than the presumptive rate?
Yes, you can voluntarily declare income higher than the deemed rates (8%/6% or 50%). This is beneficial when your actual profit percentage is higher, as it establishes a higher income base for future years and loan applications.
Q: What happens if I opt out of presumptive taxation?
If you opt out of Section 44AD in any of the 5 years after opting in, you cannot opt back in for the next 5 years. Additionally, tax audit becomes mandatory for those 5 years regardless of turnover.
Q: Can an LLP opt for presumptive taxation?
LLPs cannot opt for Section 44AD (business) but can opt for Section 44ADA if engaged in specified professions. However, partnership firms (not LLPs) can opt for both sections.
Q: Is presumptive income applicable for GST purposes?
No, presumptive income under Income Tax is completely separate from GST. You must calculate GST on actual turnover and comply with all GST requirements regardless of the income tax scheme you choose.
Q: Can I claim deductions under Chapter VI-A along with presumptive income?
Yes, you can claim deductions under Sections 80C to 80U over and above the presumptive income. For example, if your deemed income is ₹6 lakhs, you can still claim 80C deduction of ₹1.5 lakhs.
Q: What if my turnover exceeds the limit mid-year?
The turnover limit is checked for the entire financial year. If your turnover exceeds ₹3 crores (or ₹75 lakhs for professionals) at any point, you will not be eligible for presumptive taxation for that year.
Q: Can I switch between normal provisions and presumptive every year?
For professionals (44ADA) and transporters (44AE), yes. However, for businesses (44AD), if you opt out after opting in, you cannot opt back in for 5 years and tax audit becomes mandatory.
Q: Is audit required if I opt for presumptive taxation?
No, tax audit under Section 44AB is not required if you opt for presumptive taxation and declare income at the prescribed rates (or higher). This is one of the major benefits of the scheme.