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Tax Queries: Got income below Rs. 50 lakhs? Know All About Presumptive Tax

Jun 29, 2018 | 2 years ago | Read Time: 3 minutes | By iKnowledge Team

What is presumptive tax?

As a small business owner, you may not have the requisite accounting team to maintain accounting data or calculate your business’ profit and loss. Under such circumstances, it may get difficult to become fully aware of the income you are generating from your business or know how much tax you have to pay.

In such cases, without proper and accurate records of their income, it becomes difficult to compute their tax liability. Some might even take advantage of lack of information about their income and default on or evade taxes.

Keeping this in mind, and to reduce the burden of compliance, the Income Tax Department has provided simple measures where income is estimated based on gross receipts and tax is computed on such income. This method of assuming total income and paying tax is known as ‘presumptive tax’.

Who can avail of presumptive tax?

Under Section 44AD, presumptive income tax rate can be availed by professionals whose total gross receipts are less than Rs. 50 lakhs in a financial year. Their income would be assumed to be 50% of total receipts and tax shall be liable upon that.

Features of presumptive tax:

  • Professionals who opt for presumptive tax are not mandated to maintain audited books of account. Their profit is simply presumed to be a certain percentage of their total sales/receipts.
  • The taxpayer can’t claim business expenses as deduction
  • The taxpayer can declare a higher income however, if he chooses to declare a lower income, he needs to maintain audited books of accounts.

However, if you have more than one small business, the presumptive tax scheme to be opted for every respective business. For instance, you run four small firms but only one of them has been evaluated under Section 44AD. In this case, you can avail of the relief of not holding accounting records and no demand of an audit only on the business where Section 44AD is applied. The other three businesses that are not assessed under Section 44AD will have to maintain accounting records as well as conduct audits.

Eligibility Criteria for Presumptive Tax:

  • The gross receipts or turnover of the small business that you wish to assess under Section 44AD must be less than Rs. 2 crores
  • You must be an Indian Resident/Citizen
  • The presumptive tax scheme is permitted only to an individual, a Hindu Undivided Family (HUF) or a partnership firm.
  • The tax is not allowed for a registered company.

Qualified Businesses:

Eligible business can include any small business to avail this scheme. This includes retailing of goods, wholesale trading, realty and civil construction business. However, the presumptive tax scheme is NOT applicable to the following areas of business:

  • Revenue generated through commission agencies or brokerage firms
  • Agency firms
  • According to Section 44AE, any business that provides, hires or leases goods carriages
  • Any professional commerce, including judicial, medical, applied sciences, architecture, accounting, technical practice, interior design, company secretary and information technology.
  • Authorised representatives for any business that demands a fee or remuneration
  • Professionals in the film industry including producers, actors, cameramen, film, music, art, dance and movie directors, editors, singers, lyricists, writers, designers etc.

Karan runs a kirana store in his society. The gross receipts of his business were Rs. 1,45,00,000 in the financial year 2016-17. Was Karan able to take advantage of the presumptive tax scheme under section 44AD?

Karan is an Indian National and the receipts earned from his kirana store were less than Rs. 2 crore. The nature of trade is not listed under the non-eligible businesses list and hence he was able to avail of the tax deductions under Section 44AD.

 When can presumptive tax be availed?

It is to be noted that the taxpayer can only avail the benefit of presumptive tax in the year where his total gross receipts do not exceed Rs. 50 lakhs. If the total receipts are more than Rs. 50 lakhs in the subsequent year, the professional is not eligible for presumptive taxation. However, if his income is less than Rs. 50 lakhs in the year after that, he can opt for this scheme again. A professional can opt in or out of the presumptive tax rule. However, if he opts out of it, he will be required to maintain records of his accounts and get them audited.

Advt. no.: IA/Jun 2018/4152


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