Opting for Presumptive Taxation Scheme while filing ITR? Know the Opt-in Opt-out Rules

As per the Income-tax Act, a person engaged in business or profession is required to maintain regular books of account and further, he has to get his accounts audited. However, to give relief to small taxpayers from the tedious job of maintenance of books of account and from getting the accounts audited, the Income-tax Act has framed the presumptive taxation scheme under sections 44AD, 44ADA and 44AE.

What do you mean by presumptive taxation?

Presumptive taxation scheme lets the taxpayers declare their taxable income at a prescribed rate irrespective of actual profit/gains and in turn relieves them from the burden of maintaining regular books of account and getting the same audited.

For small taxpayers the Income-tax Act has framed presumptive taxation schemes as given below:

The presumptive taxation scheme of section 44AD for taxpayers engaged in any business
The presumptive taxation scheme of section 44ADA for taxpayers engaged in specified profession
The presumptive taxation scheme of section 44AE for taxpayers engaged in the business of plying, hiring or leasing of goods carriages

Who are eligible taxpayers who can claim presumptive taxation under Section 44AD?

The presumptive taxation scheme of section 44AD can be adopted by following persons carrying out any business other than business covered under Section 44AE:

Resident Individual
Resident Hindu Undivided Family
Resident Partnership Firm (not Limited Liability Partnership Firm)
Any person who has not claimed deductions under section 10A/10AA/10B/10BA or under sections 80HH to 80RRB in the relevant year

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What is the monetary threshold under Section 44AD?

The presumptive taxation scheme of section 44AD can be opted by the eligible persons, if the total turnover or gross receipts from the business does not exceed Rs. 2 crore.

What is the manner of computation of taxable business income in case a person is adopting presumptive taxation scheme under section 44AD?

In case of a person adopting the provisions of section 44AD, income is computed on presumptive basis at:-

6% of total turnover or gross receipts of a tax year received by account payee cheque/bank draft, ECS through bank account on or before due date of filing the return of income
8% of total turnover or gross receipts of a tax year in all other cases

Who are eligible taxpayers who can claim presumptive taxation under Section 44ADA?

The presumptive taxation scheme of section 44ADA is designed to give relief to small taxpayers engaged in specified profession. A person resident in India engaged in following professions can take advantage of presumptive taxation scheme of section 44ADA:-

Legal
Medical
Engineering or architectural
Accountancy
Technical consultancy
Interior decoration
Any other profession as notified by CBDT

What is the monetary threshold under Section 44ADA?

The presumptive taxation scheme of section 44ADA can be opted by eligible persons, if the total gross receipts do not exceed Rs 50 lakhs.

What is the manner of computation of taxable business income in case a person is adopting presumptive taxation scheme under section 44ADA?

In case of a person adopting the provisions of section 44ADA, income will be computed on presumptive basis @ 50% of the total gross receipts of the profession.

Who are eligible taxpayers who can claim presumptive taxation under Section 44AE?

Any taxpayer in the business of plying, hiring or leasing of goods carriages who owns not more than 10 goods carriages at any time during tax year can claim presumptive taxation under Section 44AE.

What is the manner of computation of taxable business income in case a person is adopting presumptive taxation scheme under section 44AE?

Prescribed / presumptive income shall be higher of:-

Rs 7500 per goods carriage for every month or part of the month during which the goods carriage is owned by the taxpayer in the tax year Or
Amount claimed to be actually earned

What deductions will not be available if one opts for presumptive taxation under section 44AD, section 44ADA or section 44AE?

No other deductions for business expenses which are normally allowed can be claimed for instance depreciation, rent, administrative expenses etc. Written down value of assets can be computed as if depreciation is and has always been claimed

No need to maintain books of account as prescribed under section 44AA if one opts for presumptive taxation under section 44AD, section 44ADA or section 44AE?

Section 44AA deals with provisions relating to maintenance of books of account by a person engaged in business/profession.

In case of a person engaged in a business and opting for the presumptive taxation scheme of section 44AD, section 44ADA or section 44AE, the provisions of section 44AA relating to maintenance of books of account will not apply.

What are the rules for opting under the presumptive taxation scheme?

5 Year Block in Period

As per Section 44AD, where a taxpayer opts for presumptive taxation scheme for any of the financial year he is required to continue to opt for the same for next 5 years.
If he fails to do so, he will not be eligible to opt for presumptive taxation scheme u/s 44AD for 5 years succeeding the year in which he opts out.
Further, with respect to those 5 financial years where taxpayer is ineligible to opt for presumptive taxation scheme u/s 44AD, regular books of account need to be maintained and audit shall be conducted if total income exceeds maximum amount not chargeable to tax.
For instance, if taxpayer has opted for presumptive taxation under Section 44AD for Year 1 and Year 2 but opts out of it in Year 3, then the taxpayer would not be eligible to opt for presumptive taxation from Year 4 to Year 8.
No such 5 year limit is available under Section 44AE and 44ADA

Turnover or Gross Receipts limit

Any business that has a turnover of less than Rs 2 crore only can opt to be taxed presumptively under Section 44AD.
A professional having a gross revenue upto Rs 50 lakhs can opt for the presumptive scheme of tax

Return of Income

ITR-4 Form is the return form for those taxpayers, who have opted for the presumptive income scheme as per Section 44AD, Section 44ADA and Section 44AE and whose income is not more than Rs 50 lakh.
The ITR 3 is applicable for individual and HUF who have income from profits and gains from business or profession and also includes income under Presumptive basis taxation under section 44AD, 44AE, 44ADA.

Eligible small businesses or professionals should take advantage of this presumptive scheme as it not only makes taxation easier but also helps reduce the income tax liability.