Section 44AE: Presumptive Income Scheme

Section 44AE is a provision under the Income Tax Act, 1961 that prescribes the presumptive income scheme for certain small taxpayers who are engaged in the business of leasing, hiring, or plying of goods carriages. 

 

The goal with Sec. 44AE of Income Tax Act is to: 

1. Simplify tax compliance procedures

2. Relieve tedious bookkeeping duties

3. Provide a uniform method for calculating income

 

The taxpayers who choose this presumptive taxation income scheme are not required to keep their accounts books or have them audited.

All taxpayer categories are subject to the presumptive income scheme u/s 44AE. This scheme is available to all taxpayers, including individuals, HUFs, partnership firms, and registered companies. There are simply no restrictions on any group of taxpayers, in contrast to other schemes like Section 44AD.

Who Can Apply?

If the taxpayer meets the conditions below, they can opt for the Presumptive Income Scheme and declare their income at a prescribed rate per month, irrespective of their actual income. 

 

To be eligible for this taxation scheme, here are the criteria: 

• The taxpayer is engaged in the business of leasing, hiring or plying of goods carriages

• The taxpayer must not own more than 10 goods carriages at any time during the particular fiscal year

• He/she should not have opted for the presumptive taxation scheme under any other provision of the Income Tax Act

 

Deductions under Section 30 to Section 38 cannot be claimed by a taxpayer who is subjected to Section 44AE's presumptive taxation. However, in accordance with Section 40(B)'s rules, partnership firms are permitted to deduct the aforementioned costs.

 

Under Section 44AE, the income of taxpayers is a total of the gains they earn in the preceding financial year from all good carriage vehicles. These goods carriage vehicles are of two types, i.e. light goods vehicles and heavy goods vehicles. 

 

‘Goods Vehicles’ refer to any vehicle designed or adapted for carrying goods or other materials. Whereas, ‘Heavy Goods Vehicles’ is a specific category of goods vehicles that have a gross vehicle weight of more than 12,000 kgs.

 

The calculation of income varies based on the vehicle type. 

1. Heavy Goods Carrying Vehicles

For these vehicle types, the income is calculated in the following 2 ways:

• Calculating tax on an amount equal to ₹1,000 for every ton of the gross weight or the monthly unladen weight for every month of the ownership of the vehicle

• Calculating tax on the amount that the taxpayer earned during the last financial year

2. Light Goods Carrying Vehicles

For these vehicle types, an amount equal to ₹7,500 must be taxed every month. This is applicable to the vehicles that the taxpayer owned in the last financial year. Note that in case of partial ownership in a month, that part will be considered as a full month. Also, hired vehicles are also considered as owned vehicles.

 

To calculate the presumptive income under Section 44AE, the taxpayer needs to multiply the prescribed rate by the number of goods carriages owned by them during the financial year. 

 

Here are the formulas:

1. Taxable income on Heavy Goods-Carrying vehicles = No. of Vehicles * No. of Months * 1000 * No. of Tons

 

2. Taxable income on Light Goods-Carrying Vehicles = No. of Vehicles * No. of Months * 7500

 

Here is an example to help you understand the calculation better:

 

Consider that a person has hired 4 heavy goods-carrying vehicles weighing 13,000 Kgs from 1st May, 2021, to 20th December, 2021. In addition, they have hired 3 light goods-carrying vehicles from 1st November, 2021 to 31st April, 2022.

The taxpayer can deduct salaries given to partners and workers as well as interest payments if the taxpayer is a partnership firm as defined under Section 44AE of the Income Tax Act. Section 40(B) explains the full extent of this taxation in detail. 

 

Partnership firms can lower their taxable income and subsequent tax burden by taking advantage of these deductions.