What Is Section 44AE? Explained in Simple Terms

The presumptive taxation scheme covers section 44AE of the Income Tax Act. It aims to ease small businesses or professionals from the hassle of maintaining books of accounts and examining their accounts.

The presumptive taxation scheme handles three distinct sections:

• Section 44AD
• Section 44AE
• Section 44ADA

Anyone who is a business owner and uses presumptive taxation can declare income according to a specified rate. They can get relief from the need to keep books of account and have their accounts checked.

This blog will look into the details in section 44AE, which is part of the income tax law. The law under section 44AE provides relief for taxpayers. These include those who have less than 10 carriages of goods at any point in the preceding year, and they could also be ones involved in leasing or plying goods carriages.

Did you know?

In the budget of 2016, it was declared that if you opt for this scheme, you'll be required to adhere for the next 5 years. If you fail to follow through, the presumptive tax scheme will be inaccessible until the end of 5 years. In such a situation, you must keep a record of your accounts and check them.

Also Read: All About Section 36(1)(va) with Section 43B

What is Section 44AE?

Assessees covered under section 44AE and reporting lower profits than estimated profits are required to maintain the books of accounts as per section 44AA. They also need to complete the account auditing process and provide an audit report in section 44AB.

Taxpayers with trucks or any other vehicles that weigh less than 10 vehicles more than the taxpayer with the activities of leasing or hiring, these heavier vehicles than that taxpayer may take his earnings of ₹7500 per month per vehicle and file an IT return. In the past, this figure was ₹5000 and ₹4500.

This relief is available to anyone assessed, i.e., it could be either a company, individual, HUF, HUF partnership firm, etc. There aren't any deductions in the case of the deemed income of ₹7500, and it includes depreciation of the same and will be considered your net earnings as a taxpayer. In the case of a partnership firm, the expense associated with the remuneration paid to the partners will be eligible to be claimed as a deduction. Therefore, this could be advantageous for the taxpayer that is the partner in the partnership.

Maintaining Books of Accounts

Anyone in the business or profession needs to keep records of business accounts under section 44AA. If a person declares income at a presumed amount in the first instance, the rule relating to keeping accounts books is not applicable.

1. The owners of businesses do not have to keep books of account under section 44AA.
2. Business owners do not need to examine their accounts as per section 44AB.

Eligibility Criteria

As we mentioned earlier, the business of hiring, leasing, or plying goods transport vehicles is eligible for the presumptive tax scheme. There are two essential considerable criteria for eligibility:

• The business of hiring, leasing, and plying transportation of goods. If an assessor engages in a business dealing with passengers transporting vehicles or passengers, he can't choose a plan.
• A maximum of 10 goods-carrying vehicles. An assessee who owns more than ten of these vehicles can't opt for the scheme.

Other Provisions of Section 44AE

1. Each class of taxpayers can prepare a tax return based on revenue per vehicle. It can be - individual/ company/ partnership/ firm/ LLP/HUF, etc.)
2. There are occasions when hauliers do not have an automobile for a full month. They might own it for a specific period. In this case, the law defines this to be an entire month.
3. If you need to disclose income in this section, ITR 4 will apply.
4. The taxpayer can report more revenue than this section requires. In certain instances, taxpayers need to disclose income less than the section specifies. This is where they must follow section 44AA and section 44AB.
5. Businesses that report revenues under sections 44AE, 44AA and 44AB won't apply.
6. The law does not permit the taxpayer to deduct expenses, depreciation, or other costs from the deemed income.
7. The regulations of section 44AE apply only to taxpayers in the leasing industry or the purchase of goods. The provisions do not apply to a person who has contracted to lease a vehicle. That is, anyone who owns an automobile may report the income. However, a person having a vehicle on rent doesn't need to divulge the income per this section.

How Do You Determine the Taxable Income?

We've explained below the summing up of the eligible assessees who choose the presumptive taxation scheme with an example:

1. The above calculation does not take into account which vehicle you have. It can be a light goods vehicle (less than 12MT or less) or a heavy goods vehicle (more than 12MT).
2. The tax-deductible income (net) will be calculated at an amount of ₹7500 per month for each vehicle or a portion thereof in the year of financial accounting for which the vehicle is possessed.
3. It is also important to note that certain portions of the month are considered a complete month in the computation of tax-deductible income.
4. The taxpayer liable for income tax calculation under the presumptive taxation scheme of section 44AE can't enjoy any deduction of expenses.

Also Read: Section 194O: The Ultimate Guide on TDS Payments for E-commerce Businesses

Declaration of Lower Income

The assessee can decide whether to display income he eventually earned less than the amount calculated under the presumptive basis. In this situation, it is advisory to get a CA to review your accounts as per sections 44AA and 44AB. What if the revenue from the real basis is more than the presumptive basis? Well, it's up to the assessor's discretion on which income he'd like to be able to judge.

Exemptions Under Section 44AE

In accordance with sections 30 to 38 in the Income Tax Act, assessees choosing to use the presumptive taxation scheme aren't eligible for any deductions or exemptions. The amount of ₹7,500 per month is the total taxable income. However, you can benefit from income tax deductions and exemptions in sections 80C and 80U.

If you're a partnership company, you can take deductions for the salary and interest you paid to partners. Section 44AE of the Income Tax Act does not permit a depreciation deduction. But you can evaluate the value of any written-down property used in the business, assuming that depreciation under section 32 is permissible. The people who fall under section 44AE do not need to comply with section 44AA. However, those subject to the presumptive tax system must pay a tax in advance.

Conclusion

After examining the different aspects of section 44AE, we've concluded. It offers a straightforward method for assessees or small businesses operating on the plying/leasing/hiring to determine their tax-deductible income without the hassle and less compliance. In addition, it provides a huge reduction in the maintenance of their accounting books and the audit.
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