Taxation of income: What is a presumptive tax scheme? a clarifier

 Taxation of income: What is a presumptive tax scheme? a clarifier

A taxpayer can use the presumptive taxation scheme to declare income at a predetermined rate. In exchange, he is not required to keep books of account or have them audited.

The Income-tax (I-T) Act provides a presumptive taxation scheme to relieve small taxpayers of the burden of maintaining books of account and having them audited.

This scheme is divided into three sections, one for small businesses, one for specific professionals, and one for businesses operating goods carriages. Income tax payers who want to use presumptive taxation should consider the following:

First and foremost, the income calculated under this scheme is the final income; no additional expenses are permitted.

Second, taxpayers are not required to keep accounts under these provisions.

Third, if a taxpayer chooses the presumptive taxation scheme, he must continue to use it for the next five years. If he or she fails to do so, the presumptive taxation scheme will be unavailable to him or her for the next five years.

How does it work?

A taxpayer can use the presumptive taxation scheme to declare income at a predetermined rate. In exchange, he or she is not required to keep books of account or have them audited.

There are three types of presumptive taxation provisions.

1. Small taxpayers: Section 44AD's presumptive taxation scheme is intended to provide relief to small taxpayers engaged in any business. It is followed by the resident individual, the resident Hindu Undivided Family (HUF), and the resident partnership firm.

It is critical to note that a person earning commission or brokerage income cannot use the presumptive taxation scheme.

Furthermore, a person whose total turnover or gross receipts for the year exceed 3 crore cannot use section 44AD's presumptive taxation scheme. Previously, this limit was 2 crore, but in Budget 2023, it was increased to the new limit.

Taxpayers who choose the presumptive taxation scheme under section 44AD must pay the entire amount of advance tax on or before March 15 of the preceding year.

2. Specified professionals: The section 44ADA scheme is intended to provide relief to small taxpayers engaged in specified professions such as law, medicine, engineering, accounting, technical consultancy, interior decoration, and any other profession notified by the CBDT.

The presumptive income is computed at a rate of 50%, which is considered the final income, and no additional expenses are permitted after this. This option is available to professionals earning less than Rs 75 lakh per year. Previously, the limit was set at 50 lakh, but it was recently raised to 75 lakh in the Budget 2023.

Taxpayers who choose the presumptive taxation scheme under Section 44ADA must pay the entire amount of advance tax on or before March 15 of the preceding year.

3. For the business of goods carriages: The section 44AE scheme is intended to provide relief to small taxpayers who are in the business of plying, hiring, or leasing goods carriages and do not own more than ten goods vehicles at any time during the year.

Finally, small-scale business owners and professionals are given the option of presumptive taxation, which allows them to declare their income based on a guess and pay advance tax accordingly. As a result, they are not required to keep or obtain accounts.

However, in order to qualify for this benefit, their gross income must be less than 3 crore for businesses and 75 lakh for professionals.