Presumptive Taxation Scheme: All You Need To Know

There are two options available to pay income tax. Under the first option, an assessee can compute taxable income on the basis of books of account. The second option is Presumptive Tax Scheme wherein the income will be estimated on the basis of total turnover or gross receipts.

As per the presumptive tax scheme under Section 44AD, 8 per cent of gross receipts or turnover will be deemed as income of the taxpayer. However, in the Union Budget 2017, such limit has been proposed to be reduced to 6 per cent for digital receipts of taxpayers. The Presumptive Tax Scheme is particularly meant for SMEs to relieve them from burden of maintaining books of account and getting them audited.

Any individual, an HUF (Hindu Undivided Family) or a partnership firm, which is resident in India, can opt for Presumptive Tax Scheme. However, if the total turnover or gross receipt of taxpayer is more than Rs 2 crore, then it cannot take the benefit of Presumptive Taxation Scheme. In that case, it needs to get books of account audited by a Chartered Accountant.

Who cannot avail benefit of this scheme under Section 44AD?

• Limited liability partnerships and companies
• Taxpayers claiming profit-linked deductions under Sections 10A, 10B, 80-IA etc.
• Any person engaged in business of plying, hiring or leasing of goods carriages
• Any person earning income in nature of commission or brokerage
• Any person carrying on any agency
• Professionals like chartered accountants, lawyers, company secretaries, engineers, film artists etc.

• You are not required to maintain books of account and get them audited. However, you need to maintain basic records to establish nature of business and its total turnover or gross receipts.
• You cannot claim any deduction for business expenditure.
• Taxpayers who have not opted for Presumptive Tax Scheme need to file bulky return in ITR-4. However, taxpayers opting for Presumptive Tax Scheme need to file simplified return Form ITR-4S.

• After opting for it, you will have to continue with the Presumptive Taxation Scheme for the next five years, otherwise you will need to get your books of account audited by a Chartered Accountant for the next five years. For example, let's say Mr A has availed the benefit of presumptive tax for Assessment Year 2017-18 and offers income of Rs 8 lakh on a turnover of Rs 1 crore. He continues with such Scheme for AYs 2018-19 and 2019-20 as well. However, for AY 2020-21, he did not opt for such a scheme. In this case, he will be liable for audit from Assessment Years 2021-22 to 2025-26.
• Generally, the advance tax needs to be paid in four instalments starting from the month of June of a financial year. One has to pay 15 per cent of the estimated income tax by June15, an aggregate of 45 per cent by September 15, an aggregate of 75% by December 15, and the rest by March 15 of the relevant financial year. However, a taxpayer opting for Presumptive Taxation Scheme needs to pay advance tax in one instalment, that too by March 15 of the financial year.
• Taxpayers opting for Presumptive Tax Scheme need to segregate the digital transactions and other transactions as the rate of deemed income is 6 per cent for digital receipts and 8 per cent for other receipts.
• If there are any credit sales during the period from April 1, 2016 to March 31, 2017 and you expect to receive payment by digital means, make sure that such payment is received before due date of filing of return in ITR-4S. If you receive such payment before such due date then your income will be determined at the rate of 6 per cent, otherwise rate of 8 per cent will apply on such credit sales.
• If a taxpayer believes that profit from his or her business is lower than the rate of 8 per cent or 6 per cent, he or she may declare profit at such lower rate but he has to maintain books of account and get them audited by a Chartered Accountant.