Be it small businesses or professional freelancers; it becomes exceptionally daunting always to manage different projects and maintain balance sheets or financial records as soon as the tax filing season approaches. But, you have to pay the taxes on time to become a responsible citizen. Then, what to do?
Fret not as we are here to help you know a solution that can ease your tax-saving task when the tax filing season is near. This is possible with the help of a scheme known as the Presumptive Taxation Scheme (PTS).
Incorporation of this plan allows you the option to calculate your tax on an estimated profit or income. With the help of this scheme, you can continue strengthening your professional role without having to worry about maintaining a book of accounts. Therefore, wait no more and dive in to know about this fantastic scheme in detail.
What is a Presumptive Taxation Scheme?
The Presumptive Taxation Scheme (PTS) was introduced per the Sections 44AA of the Income Tax Act, 1961. This scheme has been formulated, keeping in mind the small taxpayers.
The Presumptive Taxation Scheme helps the income professionals and the small business owners ease the tedious task of getting the accounts audited and maintaining a book of accounts.
With this scheme in action, people falling in the strata of small taxpayers can declare their total taxable income at the rate set in advance. This scheme has been described under three sections: Section 44AD, Section 44ADA, and Section 44AE.
Presumptive Taxation Scheme Under Section 44AD
Under Section 44AD, the benefits associated with the Presumptive Taxation Scheme will be available for small businesses or firms who fulfill a specific set of criteria, as mentioned below:
- Any individual who is a resident of India
- Residents belonging to Hindu Undivided Families (HUFs)
- Any partnership firm that is resident to India (except Limited Liability Partnership Firm)
- Any individual taxpayer who has not claimed deductions under Section 10A, 10AA, 10B, 10BA or under any provisions mentioned in Chapter VIA for the relevant assessment year.
While the Presumptive Taxation Scheme was introduced to offer to relieve the small taxpayers so that they can engage more time in strengthening their business.
There are a few exceptions regarding the type of business a person cannot be involved in to be entitled to this scheme’s benefits outlined under Section 44AD.
Check out these exceptions once you have complied with the eligibility criteria.
- Any person involved in the agency business.
- A person whose income comes in the form of commission or brokerage.
- Any business having a total turnover of Rs. 2 crores or more than that.
- Any businesses under Section 44AE that involve hiring, plying, or leasing of goods carriage.
- Insurance agents (as they earn via commission)
Important note: Any person who adopts the Presumptive Taxation Scheme under Section 44AD will be liable to pay the entire amount of advance tax on or before the 15th of March of the assessment year. Failing to adhere to this norm will make you liable to pay interest as per Section 234C.
Presumptive Taxation Scheme Under Section 44ADA
The Presumptive Taxation Scheme outlined under Section 44ADA has been fabricated to ease the process of maintaining account ledgers and auditing of accounts for small taxpayers who are engaged in some specified professions.
Any person who is a citizen of India and is engaged in the below-mentioned professions can adopt the Presumptive Taxation Scheme as per Section 44ADA.
- Engineering or Architectural
- Interior Decoration
- Technical Consultancy
- Or any other profession notified by CBDT (Central Board of Direct Taxation)
Limitation regarding the professionals who cannot avail the benefits entitled under Section 44ADA:
- Any professional whose total gross receipts from his profession exceed Rs. Fifty lakhs in a specific financial year will not be eligible to adopt the Presumptive Taxation Scheme outlined under this section.
As per provisions mentioned under Section 44ADA, the income is computed @ 50% total gross receipts of the profession. However, the person adopting the provisions of Section 44ADA can declare income higher than 50%.
Presumptive Taxation Scheme Under Section 44AE
The Presumptive Taxation Scheme under section 44AE has been introduced by the Income Tax Act to relieve the tax burden from the small taxpayers engaged in the business of plying, leasing, or hiring goods carriage, subject to certain conditions.
The ones who are eligible to avail the benefit from the Presumptive Taxation Scheme outlined under section 44AE are:
- Any individual
- Any person belonging to HUFs
- Any company
- Any firm
Conditions due to which the professional cannot avail of the presumptive taxation scheme under Section 44AE:
- The entities mentioned above must be engaged in renting, leasing, or playing of goods carriage.
- They must not possess or own more than 10 goods carriages at any time during the year.
The income of the person adopting the presumptive taxation scheme under section 44AE will be computed on the following basis:
- The individual’s taxable income will be computed based on estimation.
- The taxable income will be assessed at an estimation of Rs. 7,500 or partially on this amount monthly. It depends on the period during which the carriage of the goods stays under the ownership of that particular individual during the year.
However, the individual can declare a higher amount if the actual turnover is more than the estimation of Rs. 7500.
Note: For a person who adopts the presumptive taxation scheme under section 44AE, there is no concession for payment of advance tax. Therefore, despite adopting this provision, he will be liable to pay advance tax.
Important Points to Note:
Along with the sections explained above, individuals opting for the presumptive taxation scheme must note the following:
- He needs to file tax under this scheme for at least five years, and again.
- If the individual opts out and chooses to file taxes as per regular ITR-3 before completing three years, he will not be able to file taxes under the presumptive taxation scheme for the next five years.
The Presumptive Taxation scheme has been a welcome step to the small businesses and the professionals. It helps individuals devote all their time to strengthening their specific arenas other than worrying about reading the balance sheets and the financial records.
With the help of this scheme, you will be freed from the cumbersome task of maintaining books of accounts that would have been compulsory under certain circumstances.