The head “Profits and Gains of Business or Profession” is one of the five heads of income under the Income Tax Act, 2025. Every person carrying on a business or profession—whether as an individual, Hindu Undivided Family (HUF), partnership firm, Limited Liability Partnership (LLP), company, co-operative society or any other person—is required to compute taxable income in accordance with the provisions of Chapter D of Part D (Profits and Gains of Business or Profession) of the Act.
Unlike salary or house property income, business income is determined after considering numerous commercial transactions, statutory deductions, depreciation, valuation of inventory, recoveries, business incentives and several deeming provisions. Consequently, this is one of the most comprehensive and practical chapters of the Income Tax Act, 2025.
Whether a person runs a retail shop, manufacturing unit, consultancy practice, medical clinic, legal office, engineering firm, online business, startup or multinational enterprise, the income arising from such activities is generally assessed under this head, subject to the provisions of the Act.
This series aims to explain the provisions relating to Profits and Gains of Business or Profession in simple language with practical illustrations, comparison with the corresponding provisions of the Income-tax Act, 1961, frequently asked questions and practical guidance.
In Part 1, we shall discuss:
- Chargeability of business income.
- Meaning of business and profession.
- Scope of Section 26.
- Categories of income covered.
- Difference between business, profession and employment.
- Practical illustrations.
About this Series
To make this subject easy to understand, the entire chapter has been divided into four parts.
| Part | Topic |
| Part 1 | Chargeability, Meaning of Business, Profession and Scope of Business Income |
| Part 2 | Allowable Business Expenditure and General Principles of Deduction |
| Part 3 | Depreciation, Scientific Research and Other Deductions |
| Part 4 | Presumptive Taxation, Practical Issues, Illustrations and FAQs |
Provisions Covered in this Article
| Income Tax Act, 2025 | Corresponding Provision under the Income-tax Act, 1961 | Subject Matter |
| Section 26 | Section 28 | Income under the head “Profits and Gains of Business or Profession” |
| Definitions Chapter | Section 2 | Meaning of Business and Profession |
Overview of Chapter D – Profits and Gains of Business or Profession
The provisions relating to business and professional income constitute one of the largest computation chapters in the Income Tax Act, 2025.
Broadly, this Chapter deals with:
- Chargeability of business income.
- Allowable business expenditure.
- Specific disallowances.
- Depreciation.
- Scientific research expenditure.
- Specified business deductions.
- Inventory valuation.
- Unabsorbed depreciation.
- Presumptive taxation.
- Miscellaneous computation provisions.
The objective is to compute the real taxable profits earned from carrying on a business or profession during the relevant tax year.
Chargeability of Business Income
The charging provision is contained in Section 26 of the Income Tax Act, 2025, which corresponds to Section 28 of the Income-tax Act, 1961.
Section 26(1) provides that the incomes referred to in sub-section (2) shall be chargeable to income-tax under the head “Profits and gains of business or profession.” Thus, Section 26 acts as the gateway provision which identifies the various categories of receipts that are taxable under this head.
Unlike some other heads of income, Section 26 adopts an inclusive approach, meaning that it specifically lists several categories of receipts that are deemed to be business income in addition to the ordinary profits of a business or profession.
What is Business?
Although the Act contains a definition of “business”, the term is intentionally broad so as to cover almost every organised commercial activity.
Business generally includes:
- Trade
- Commerce
- Manufacture
- Processing
- Adventure in the nature of trade
- Supply of goods
- Provision of commercial services
- Commission agency
- Brokerage
- Digital commerce
- Online marketplaces
- Contract business
- Franchise business
- Import-export activities
The courts have consistently held that the word “business” should receive a liberal interpretation, depending upon the facts of each case.
A business may be carried on continuously or through a series of organised commercial transactions undertaken with a profit motive.
What is a Profession?
A profession generally refers to an occupation requiring specialised education, technical qualification, intellectual skill or professional expertise.
Examples include:
- Chartered Accountant
- Advocate
- Doctor
- Company Secretary
- Architect
- Engineer
- Interior Designer
- Tax Consultant
- Management Consultant
- Financial Advisor
- Software Professional
Professional income is also taxable under the same head, namely Profits and Gains of Business or Profession.
Business vs Profession
Although both are taxable under the same head, there are important distinctions.
| Basis | Business | Profession |
| Nature | Commercial activity | Skill-based occupation |
| Primary Factor | Capital, organisation and commercial operations | Knowledge, qualification and expertise |
| Income Source | Sale of goods or commercial services | Rendering specialised professional services |
| Qualification | Not always necessary | Generally requires specialised knowledge |
| Examples | Trading, manufacturing, retail business | Medical practice, legal practice, accountancy |
Business vs Employment
Many taxpayers confuse business income with salary income.
The distinction is important because both heads are governed by different computation provisions.
| Particular | Business | Employment |
| Relationship | Independent | Employer-employee |
| Control | Independent decision-making | Works under employer’s supervision |
| Tax Head | Business Income | Salary |
| Risk | Business risk borne by owner | Minimal commercial risk |
| Examples | Shop owner, consultant | Government employee, company employee |
Objectives of Section 26
Section 26 has been enacted to bring within the tax net various receipts arising from business or professional activities.
Broadly, the provision seeks to tax:
- Normal business profits.
- Professional income.
- Certain compensation receipts.
- Export incentives.
- Business-related benefits or perquisites.
- Specified receipts of partners.
- Certain non-compete receipts.
- Keyman Insurance Policy proceeds.
- Other receipts specifically treated as business income under the Act.
In the subsequent part of this series, each of these categories will be discussed individually with practical illustrations.
Scope of Business Income
Business income is much wider than merely the profit shown in the books of account.
The taxable income may include:
- Profits from manufacturing.
- Trading income.
- Consultancy fees.
- Professional receipts.
- Brokerage.
- Commission.
- Export-related incentives.
- Business compensation.
- Benefits arising from business.
- Certain recoveries.
- Other receipts specifically included under Section 26.
Similarly, certain receipts which appear to be business receipts may actually be taxable under another head, depending upon the specific provisions of the Act.
Detailed Analysis of Section 26(2): Business Income Chargeable to Tax (Clauses a to f)
In the previous part, we discussed the basic concepts of business income, the meaning of business and profession and the scope of Section 26 of the Income Tax Act, 2025.
In this part, we examine the first six clauses of Section 26(2) in detail. These clauses identify several categories of receipts that are specifically chargeable under the head “Profits and Gains of Business or Profession.”
Structure of Section 26(2)
Section 26(2) is an inclusive provision. It not only covers the ordinary profits of a business or profession but also specifies various other receipts which are deemed to be business income.
The first six clauses covered in this article are:
| Clause | Corresponding Section of the Income-tax Act, 1961 | Nature of Income |
| Section 26(2)(a) | Section 28(i) | Profits and gains of business or profession |
| Section 26(2)(b) | Section 28(ii) | Compensation for termination or modification of management, agency or business contracts |
| Section 26(2)(c) | Section 28(iii) | Compensation on vesting of management in Government |
| Section 26(2)(d) | Section 28(iii) | Income of trade, professional or similar associations from specific services to members |
| Section 26(2)(e) | Section 28(iiia) to (iiie) | Export incentives |
| Section 26(2)(f) | Section 28(iv) | Value of benefit or perquisite arising from business or profession |
Section 26(2)(a) – Profits and Gains of Business or Profession
This is the principal charging clause.
It provides that the profits and gains of any business or profession carried on by the assessee at any time during the tax year shall be chargeable under the head “Profits and Gains of Business or Profession.”
This clause covers the normal operating income earned from carrying on business or professional activities.
Examples
- Profit earned by a grocery shop.
- Income from a manufacturing unit.
- Professional fees received by a Chartered Accountant.
- Consultancy charges received by an engineer.
- Commission earned by a broker.
- Income from an online trading business.
Practical Illustration
Mr. A runs a wholesale stationery business.
During the tax year:
- Sales = Rs. 80,00,000
- Business expenditure = Rs. 67,00,000
Business Profit = Rs. 13,00,000
The profit of Rs. 13,00,000 is chargeable under Section 26(2)(a).
Important Points
- The business need not continue throughout the tax year.
- Even if carried on for part of the year, profits are taxable.
- Both business income and professional income are covered.
Section 26(2)(b) – Compensation for Termination or Modification of Business Rights
Businesses often receive compensation when management rights, agency rights or commercial contracts are terminated or substantially modified.
Section 26(2)(b) specifically includes such compensation within the scope of business income. It applies, among other situations, to compensation received by a person for:
- wholly or substantially managing the affairs of an Indian company or, in India, of any other company;
- holding an agency in India for any part of the business activities of another person; or
- termination or modification of a business contract relating to such management, office, agency or contract.
Practical Illustration
ABC Ltd. appoints Mr. X as its sole marketing agent for Maharashtra.
After five years, the agreement is terminated and the company pays compensation of Rs. 20,00,000.
Since the compensation arises because of the termination of the agency agreement, it is chargeable as business income under Section 26(2)(b), subject to the facts and applicable law.
Why is this provision important?
Without such a provision, compensation received on termination of business arrangements could give rise to disputes regarding whether it is a capital receipt or a revenue receipt.
Section 26 expressly includes specified compensation receipts under the head Profits and Gains of Business or Profession.
Section 26(2)(c) – Compensation on Vesting of Management in Government
Certain laws provide for the vesting of the management of a property or business in the Government or a Government-owned or Government-controlled corporation.
Where compensation or any other payment becomes due to, or is received by, a person on account of such vesting, the amount is chargeable as business income under Section 26(2)(c).
Illustration
A statutory enactment transfers the management of a private industrial undertaking to a Government corporation.
The former manager receives compensation under the law.
The compensation is taxable under Section 26(2)(c).
Section 26(2)(d) – Income of Trade or Professional Associations
Trade associations, chambers of commerce, professional institutes and similar bodies frequently render specific services to their members.
Income derived from such specific services is specifically included in business income under Section 26(2)(d).
Examples include:
- Certification charges.
- Training programme fees.
- Technical consultancy.
- Industry research services.
- Testing and inspection services.
- Professional seminars conducted exclusively for members.
Practical Illustration
A professional association organises an advanced taxation workshop exclusively for its members and collects participation fees.
The income from the workshop constitutes business income under Section 26(2)(d).
Section 26(2)(e) – Export Incentives
The Government grants various incentives to promote exports.
Section 26(2)(e) specifically provides that the following receipts are taxable as business income:
- Profits on sale of import licence.
- Cash assistance against exports.
- Duty drawback.
- Duty remission.
- Any other export incentive received or receivable.
These incentives are intended to encourage exports, but once received or accrued, they become part of taxable business income unless exempt under another provision.
Illustration
An exporter receives:
- Duty drawback – Rs. 2,50,000
- Export incentive – Rs. 1,20,000
Both receipts are included while computing business income under Section 26(2)(e).
Section 26(2)(f) – Benefits or Perquisites Arising from Business
One of the widest provisions in Section 26 is clause (f).
It provides that the value of any benefit or perquisite arising from business or the exercise of a profession is taxable, whether:
- convertible into money or not;
- in cash or in kind; or
- partly in cash and partly in kind.
This provision seeks to ensure that business-related benefits are brought to tax even if they are not received as ordinary cash income.
Examples
- A supplier gifts expensive equipment to a dealer in recognition of business performance.
- A professional receives a foreign holiday sponsored by a client as consideration connected with professional services.
- A manufacturer receives valuable goods from another business entity as part of a commercial arrangement.
The taxability of a particular benefit depends on the facts of the case and the valuation provisions applicable under the Act.
Practical Illustration
A software company awards a luxury overseas trip to its highest-performing distributor.
If the trip constitutes a business benefit arising from the distributor’s business activities, the value of the benefit may be chargeable under Section 26(2)(f), subject to the applicable provisions.
Key Takeaways
- Section 26(2)(a) taxes the normal profits and gains of business or profession.
- Section 26(2)(b) covers specified compensation received on termination or modification of management, agency or business contracts.
- Section 26(2)(c) includes compensation arising on vesting of management in the Government.
- Section 26(2)(d) taxes income derived by trade, professional or similar associations from specific services performed for their members.
- Section 26(2)(e) specifically includes export incentives such as duty drawback, duty remission and cash assistance.
- Section 26(2)(f) brings to tax the value of business or professional benefits and perquisites, whether received in cash, kind or otherwise.
The provisions relating to Profits and Gains of Business or Profession form the backbone of business taxation under the Income Tax Act, 2025. Section 26 lays down the foundation by specifying the various categories of income that are chargeable under this head, including ordinary business profits, professional receipts, specified compensation, export incentives and business-related benefits or perquisites. A clear understanding of these charging provisions is essential before proceeding to the computation of taxable business income and the deductions available under the Act.
In this first part of the series, we have examined the basic concepts of business and profession, distinguished business income from salary income, and analysed the initial provisions of Section 26. These concepts serve as the starting point for understanding the taxation of commercial and professional activities under the new law. Taxpayers, tax professionals and students should always determine the correct nature of a receipt before applying the computation provisions of the Act.
In Part 2, we will continue our discussion on the remaining clauses of Section 26, covering important provisions relating to partners’ remuneration, non-compete receipts, Keyman Insurance Policy proceeds, conversion of inventory into a capital asset, recovery of specified business deductions and other receipts specifically chargeable as business income. We will also explain each provision with practical illustrations and compare the corresponding provisions of the Income-tax Act, 1961 wherever relevant.
Related Article on Simple Income Tax
1. Income Tax Act 2025 Explained
2. Salary Provisions Under Income Tax Act 2025 – Part 1
3. Salary Allowances & Perquisites Under Income Tax Act 2025
4. Salary TDS & Deductions Under Income Tax Act 2025
5. Salary Computation Under Income Tax Act 2025
8. TDS Under the Income Tax Act, 2025 (Part 3) : TDS on Business Payments
Always refer official website of Income Tax Department
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