Business Income — Overview
Business Income — Overview
A complete introduction to the head "Profits and Gains of Business or Profession" under the Income Tax Act 2025 — what is chargeable, the full section map, key deductions framework, presumptive taxation, and important rules on books of account and tax audit.
📖 Sections: 26–66 (chargeability, deductions, depreciation, presumptive taxation, books, audit)
🔄 Replaces: Sections 28–44D, 44AA–44D, 44AD–44AE of the Income Tax Act 1961
📅 Effective: 1st April 2026 (Tax Year 2026-27 onwards)
Section 26 — What is Chargeable as Business Income
Replaces Section 28 of the 1961 Act. Section 26 lists the incomes chargeable under the head "Profits and Gains of Business or Profession". Section 27 then mandates that such income is computed per Sections 28–60.
Profits and gains from any business or profession carried on at any time during the tax year — including incidental profits, capital receipts treated as revenue, and all manner of business income.
Compensation received for termination/modification of: managing affairs of an Indian company, holding an agency, or any business contract — taxable as business income regardless of name.
Value of any benefit or perquisite arising from business or profession — whether convertible into money or not, in cash or kind or both. Covers free services, rent-free premises for business purposes etc.
Interest, salary, bonus, commission or remuneration received by a partner from the firm — taxable as business income (not salary) in the partner's hands, subject to limits under Section 35(e).
Profits on sale of import licences, cash assistance against exports, duty drawback, duty remission, or any other export incentive — chargeable as business income.
Income derived by a trade, professional or similar association from specific services performed for its members — chargeable as business income.
- Keyman insurance policy receipts [26(2)(h)] — any sum received under a keyman insurance policy including bonuses
- Compensation for vesting in Government [26(2)(c)] — payment on transfer of management of property/business to Government
- Section 28(iv) equivalent — benefit from business — any benefit arising from business taxable even if not in cash
- Speculative transaction profits [26(2)(i)] — income from speculative transactions as defined
Framework — How Business Deductions Work
Business income is computed as: Gross Receipts / Turnover → Minus allowable deductions → Equals Net Business Income. The key principle is that deductions must satisfy Section 34's "wholly and exclusively for business" test unless specifically provided for.
- Premises costs (Sec 28)
- Employee welfare (Sec 29)
- Certain premiums (Sec 30)
- Bad debts (Sec 31)
- Other deductions — bonus, interest, CSR etc. (Sec 32)
- Depreciation (Sec 33)
- Any expenditure NOT in Secs 28–33
- NOT capital expenditure
- NOT personal expenditure
- Laid out wholly and exclusively for business/profession
- Subject to Section 34(2) exclusions
- Income tax, surcharge, cess (Sec 35)
- 30% of TDS-default payments (Sec 35)
- Interest to partners above limit (Sec 35(d))
- Payments to specified persons that are excessive (Sec 36)
- Certain payments not actually made (Sec 37)
Section 34 — The General Deduction Clause
Replaces Section 37 of the 1961 Act. Any expenditure (not already covered by Sections 28–33 or 44–49, 51–52) that is:
Laid out for the purposes of business or profession — no personal element
Revenue in nature — not creating an enduring benefit or asset
Not personal expenses of the assessee or family
Section 34(2) — Expenditure Not Allowed Even if for Business
- Offence or prohibited by law — bribery, kickbacks, illegal payments
- Corporate Social Responsibility (CSR) — expenditure under Section 135(5) of Companies Act 2013 is NOT deductible as business expense
- Advertisement in political party publication — or any publication by a political party
Section 35 — Amounts Not Deductible
Replaces Sections 40 and 40A of the 1961 Act. Overrides all other provisions — these are always disallowed regardless of any other section.
| Clause | What is Disallowed | Important Details |
|---|---|---|
| (a) | Income tax, surcharge, cess — paid anywhere | Includes tax paid in foreign country (for which Section 159/160 relief is available). Buy-back tax, dividend distribution tax (historical) also disallowed. |
| (b)(i) | 30% of any sum payable to a resident on which TDS is required but not deducted/deposited by due date of ITR | Deductible in subsequent year when TDS is actually deducted/paid. Full 100% deductible if TDS is paid before ITR due date. Applies only to resident payees. |
| (b)(ii) | Any amount paid to non-resident on which TDS not deducted | 100% disallowed until TDS is deducted and paid to the Government. |
| (c) | Fringe Benefit Tax / similar tax paid by employer | Any such tax paid by employer on behalf of employee is not deductible. |
| (d) | Partner's interest/salary exceeding prescribed limits | Partner's interest: max 12% per annum simple interest on capital. Partner's salary/remuneration: allowed from book profits — 90% of first ₹3L book profit + 60% of balance (minimum ₹1.5L if profitable). Salary to non-working partners: not allowed. |
| Cash payments over ₹10,000 | Single day payment to single person exceeding ₹10,000 in cash | Disallowed unless mode is banking channel. Exceptions: payment to bank, Govt, transportation under ₹35,000 etc. |
Section 37 — Deductions Allowed Only on Actual Payment Basis
Replaces Section 43B of the 1961 Act. For certain categories of liability, deduction is allowed only in the year of actual payment — not on accrual basis.
The following payments are deductible only when actually paid, regardless of the method of accounting or the year in which liability was incurred:
Exception: Employer's contribution to PF/ESI/superannuation is allowed as deduction if paid before the due date for filing the return of income (not just the due date under the relevant statute). This is a significant relaxation from the 1961 Act where it had to be paid before the PF/ESIC due date.
Section 58 — Presumptive Taxation (44AD / 44ADA / 44AE)
Replaces Sections 44AD, 44ADA and 44AE of the 1961 Act. Simplified taxation for small businesses and specified professionals — income is computed on a deemed basis without detailed books.
| Sl. | Business / Profession | Who Can Opt | Turnover / Receipt Limit | Deemed Profit Rate | Old Sec |
|---|---|---|---|---|---|
| 1 | Any business (other than goods carriage) | Eligible assessee — Individual, HUF, firm (not LLP); resident; no SEZ deduction claimed; no commission/brokerage/agency | ≤ ₹2 crore; or ≤ ₹3 crore if cash receipts ≤ 5% of total turnover | 6% of digital/banking receipts + 8% of cash receipts; or actual profit, whichever is higher | 44AD |
| 2 | Goods carriage business (plying, hiring, leasing) | Assessee owning ≤ 10 goods carriages at any time during the year | No turnover limit | ₹1,000 per ton per month (heavy goods vehicle) or ₹7,500 per vehicle per month (other); or actual profit, whichever is higher | 44AE |
| 3 | Specified profession (legal, medical, engineering, architecture, accountancy, interior design, technical consultancy, film artist) | Specified assessee — Individual or firm (not LLP); resident | ≤ ₹50 lakh; or ≤ ₹75 lakh if cash receipts ≤ 5% of gross receipts | 50% of gross receipts; or actual profit, whichever is higher | 44ADA |
Key Rules for Presumptive Taxation
- No need to maintain detailed books of account
- No tax audit requirement
- Advance tax in one instalment by 15th March
- No separate deduction for depreciation, expenses etc.
- If declared income less than deemed rate — must get books audited (Section 58(3))
- If Section 58(1) violated for any 1 year within 5 years of opting — cannot opt again for 5 years [Section 58(7)]
- WDV of assets computed as if depreciation was claimed during presumptive years [Section 58(6)]
Sections 62–63 — Books of Account & Tax Audit
Replaces Section 44AA of the 1961 Act.
- Specified professionals (legal, medical, architecture etc.) — always maintain books
- Any other business/profession: if income > ₹2.5L OR turnover > ₹25L in any of 3 preceding years
- Newly set-up business: if income likely to exceed ₹2.5L OR turnover likely to exceed ₹25L
- Books to be kept for 6 years from end of relevant tax year
Replaces Section 44AB of the 1961 Act.
- Business: turnover/sales/receipts > ₹1 crore (₹10 crore if cash receipts/payments ≤ 5%)
- Profession: gross receipts > ₹50 lakh
- Business/profession under presumptive (Section 58) declaring lower than deemed profit — if income above basic exemption
- Report: Form 3CA/3CB + 3CD
- Due date: before ITR filing due date (31st October for audit cases)
Full Section Map — Business Income (2025 Act vs 1961 Act)
| Sec (2025) | Subject | Old Section (1961) |
|---|---|---|
| CHARGEABILITY & COMPUTATION | ||
| 26 | Chargeability — all incomes under PGBP head | 28 |
| 27 | Manner of computation — per Sections 28–60 | 29 |
| SPECIFIC DEDUCTIONS | ||
| 28 | Rent, rates, taxes, repairs, insurance on premises/plant/machinery/furniture | 30, 31 |
| 29 | Employee welfare — PF, NPS, gratuity, approved funds, ESI | 36(1)(iv), (va) |
| 30 | Insurance premium — stock, cattle, employee health | 36(1)(i), (ib) |
| 31 | Bad debts and provision for bad/doubtful debts (banks: 8.5% + 10% of rural advances) | 36(1)(vii), (viia) |
| 32 | Other deductions — bonus/commission, interest on capital, family planning, securities transaction tax | 36(1)(ii), (iii), (ix) |
| 33 | Depreciation — tangible and intangible assets; block system; additional depreciation; WDV | 32 |
| 34 | General deduction — wholly and exclusively for business (not capital, not personal, not CSR) | 37 |
| DISALLOWANCES | ||
| 35 | Non-deductible amounts — income tax, 30% TDS default, partner salary/interest limits, cash payments >₹10K | 40, 40A |
| 36 | Excessive payments to specified persons — FMV benchmark | 40A(2) |
| 37 | Actual payment basis — taxes/duties, PF, leave, bonus, interest on bank loans | 43B |
| DEEMED INCOME & SPECIAL PROVISIONS | ||
| 38 | Deemed profits — remission of liability, recovery of previously deducted losses, balancing charge on block | 41 |
| 39 | Actual cost of assets — 12+ special cases (leasebacks, gifts, amalgamation etc.) | 43(1) |
| 40 | Cost of acquisition of assets becoming stock-in-trade (amalgamation, gifts) | 43(1) |
| 41 | Written down value — definition, computation, block system | 43(6) |
| 42 | Foreign exchange fluctuation — computation of gains/losses | 43A |
| 43 | Forex gains/losses on monetary items | 43AA |
| 44 | Amalgamation / demerger expenditure — amortisation over 5 years | 35DD |
| 45 | Scientific research expenditure — capital and revenue; R&D in-house; approved associations | 35 |
| 46 | Specified business — capital expenditure for cold chain, warehouse, affordable housing, hospitals etc. | 35AD |
| 47 | Preliminary expenses — amortisation over 5 years | 35D |
| 48 | Tea, coffee, rubber — income computation | 33AB |
| 49 | Oil and gas exploration — special provisions | 33ABA |
| 50 | Trade associations — specific services tax | 44A |
| 51 | VRS expenditure — amortisation | 35DDA |
| 52 | Telecom licence / amalgamation / demerger / spectrum — amortisation of specified capital expenditure | 35ABB, 35DD |
| 53 | Full value of consideration for non-capital assets (land/building) — stamp duty value rules | 43CA |
| 54 | Oil exploration — special deductions and assessments | 44BB |
| 55 | Insurance business — special computation | 44 |
| 56 | Interest income of specified financial institutions — bad/doubtful debts | 43D |
| 57 | Construction and service contracts — revenue recognition (Ind AS / percentage completion) | 43CB |
| PRESUMPTIVE & SPECIAL REGIMES | ||
| 58 | Presumptive taxation — business (6%/8%), goods carriage (₹1K/ton), profession (50%) | 44AD, 44ADA, 44AE |
| 59 | Royalty/FTS of non-residents through PE — computation | 44DA |
| 60 | Head office expenditure of non-residents — deductibility limits | 44C |
| 61 | Presumptive income — certain non-resident business activities (shipping, aircraft, turnkey etc.) | 44B, 44BB, 44BBB, 44BBA |
| COMPLIANCE | ||
| 62 | Books of account — who must maintain, what, retention period | 44AA |
| 63 | Tax audit — threshold, Form 3CA/3CB/3CD, due date | 44AB |
| 64 | Business reorganisation of co-operative banks — special deductions | 44DB |
| 65 | Interpretations for Section 64 | 44DB |
| 66 | Interpretations for Chapter IV Part D | 43 etc. |