Introduction
Understanding how Income from Business or Profession is taxed is not optional anymore — whether you are a business owner, professional, startup founder, consultant, freelancer, or student of taxation.
Under the Income Tax Act, 2025, the head “Profits and Gains of Business or Profession (PGBP)” has been expanded, clarified, and tightened to reduce ambiguity and increase compliance.
This Day 6 guide of the 15 Days Income Tax Act 2025 Series breaks down Sections 26 to 66 in a clear, exam-ready, and practical manner, covering:
- What is taxable
- What is deductible
- What is disallowed
- What is deemed as income
- How depreciation works
- Common mistakes businesses make globally
This article is written to be student-friendly, professionally accurate, and search-engine optimised for readers across the globe.
What is “Income from Business or Profession”? – Section 26
Income is taxable under this head if it arises from:
- Any business activity
- Any profession
- Conducted at any time during the tax year
Key Concept:
Even a temporary, seasonal, or discontinued business can still generate taxable PGBP income.
Important Rule:
Speculation business is treated as a separate and distinct business.
Incomes Specifically Taxable under PGBP
The law explicitly includes the following incomes to prevent tax avoidance:
1. Compensation & Termination Receipts
Taxable when received for:
- Termination of management
- Termination of agency
- Termination or modification of business contracts
2. Government Takeover Compensation
Any compensation received when:
- Business or property management vests in Government or Government-controlled entities
3. Export & Trade Incentives
Includes:
- Duty drawback
- Cash assistance
- Export incentives
- Duty remission benefits
4. Business Perquisites & Benefits
- Cash or non-cash
- Convertible or non-convertible into money
If it arises from business — it is taxable.
5. Partner’s Remuneration
- Salary
- Interest
- Bonus
- Commission
Taxable in partner’s hands to the extent allowed as deduction to the firm.
6. Non-Compete Fees
Taxable unless it qualifies as a capital receipt chargeable under Capital Gains.
7. Keyman Insurance Receipts
Always taxable under PGBP.
8. Inventory Converted into Capital Asset
- Fair Market Value (FMV) on date of conversion becomes taxable.
9. Asset Destroyed after Full Deduction
If capital asset (other than land/goodwill) was fully deducted earlier and later destroyed or transferred — receipt is taxable.
Important Exclusion You Must Remember
Rental income from a residential house property is NOT PGBP income.
It is taxable under:
“Income from House Property”, even if received by a business owner.
This distinction is a common exam and assessment trap.
How PGBP Income is Computed – Section 27
Income under this head is computed using:
Sections 28 to 60 (except Section 58)
This includes:
- Allowable deductions
- Specific disallowances
- Deemed business incomes
- Depreciation
- Valuation rules
Ignoring this structure leads to incorrect computation.
Major Allowable Deductions under PGBP
Rent, Repairs & Insurance – Section 28
Allowed if assets are used for business:
- Insurance of assets
- Municipal taxes
- Rent paid
- Current repairs (non-capital)
If used partly for business → proportionate deduction only.
Employee Welfare Expenses – Section 29
Allowed deductions include:
- Employer’s contribution to recognised PF
- Approved superannuation & gratuity funds
- Pension contribution up to 14% of salary
- Employee contribution only if deposited by statutory due date
Late deposit = disallowance.
Insurance Premium – Section 30
Deduction allowed for:
- Stock-in-trade insurance
- Health insurance of employees (non-cash mode)
Bad Debts & Provisions – Section 31
- Actual bad debts must be written off
- Provisions allowed only for specified banks & NBFCs
- Recoveries later become taxable
Depreciation – Section 33 (High-Scoring Area)
Assets Covered:
- Tangible: Building, plant, machinery, furniture
- Intangible: Patents, trademarks, licences (excluding goodwill)
Key Rules:
- Block of assets concept
- Half depreciation if used < 180 days
- Additional depreciation for new plant & machinery
- Unabsorbed depreciation carried forward indefinitely
Depreciation is mandatory, even if not claimed.
Expenses NOT Allowed – Sections 34 & 35
Not deductible:
- Illegal expenses
- CSR expenditure
- Political advertisements
- Income tax, cess, surcharge
- TDS default payments (30% disallowed)
- Excess partner remuneration
- Payments violating statutory limits
No justification can override these disallowances.
Related Party & Cash Payment Restrictions – Section 36
- Excessive payments to relatives or related entities can be disallowed
- Cash payments exceeding ₹10,000 (₹35,000 for transport) are disallowed
- Assessing Officer has wide discretionary powers
This provision is crucial for global tax planning and compliance.
Deductions Allowed Only on Actual Payment – Section 37
Includes:
- Taxes & statutory dues
- Employee welfare contributions
- Leave encashment
- MSME payments beyond due date
Paid before return filing due date → allowed.
Deemed Business Income – Section 38
Includes:
- Remission or cessation of liability
- Recovery of bad debts
- Withdrawal from special reserves
- Excess sale consideration over WDV
Applicable even if business no longer exists.
Why This Chapter Matters Globally
Even though this law is Indian, its principles apply globally:
- Substance over form
- Anti-avoidance focus
- Cash transaction restrictions
- Related party scrutiny
- Mandatory depreciation logic
These concepts align with OECD and international tax standards.
Conclusion
The Income Tax Act, 2025 has made PGBP taxation stricter, clearer, and more structured.
If you:
- Run a business
- Provide professional services
- Teach taxation
- Prepare for exams
- Advise clients
Then mastering Sections 26–66 is non-negotiable.
This Day 6 guide ensures you don’t just remember sections — you understand the logic behind them.
