Quick Answer
14 min read|Updated: Apr 1, 2026|Income-tax
Quick Answer
Income from business and profession under the Income Tax Act 2025 is computed by deducting allowable expenses (rent, salaries, depreciation, interest, repairs, etc.) from gross receipts. Depreciation follows the WDV method with rates of 10–40% depending on asset class.
| Item | Deductible When | Key Condition |
|---|---|---|
| Tax, duty, cess, fee payable to government | Actually paid on or before the due date of ITR filing | Includes GST, customs duty, excise, property tax |
| Employer contribution to PF, ESI, superannuation | Actually paid before due date of ITR filing | Employee contribution must be deposited by statutory due date under respective Act |
| Bonus or commission to employees | Actually paid before due date of ITR filing | Provision alone insufficient |
| Interest on loans from banks, financial institutions, co-operative banks | Actually paid before due date of ITR filing | Conversion of interest into loan does not constitute payment |
| Leave encashment payable to employees | Actually paid before due date of ITR filing | Provision for leave encashment not deductible until paid |
| Gratuity payable to employees | Actually paid to approved gratuity fund or directly to employee | Contribution to approved fund qualifies as payment |
| Payments to MSME suppliers (Section 43B(h) equivalent) | Must be paid within time prescribed under MSMED Act | 15 days (no agreement) or 45 days (with agreement) — disallowed if paid later |
Expert View — CA V. Viswanathan
The MSME payment disallowance under Section 43B(h) equivalent is the most significant compliance burden for businesses from AY 2025-26 onwards. If you purchase goods or services from an MSME-registered supplier and do not pay within 45 days (or 15 days without a written agreement), the entire expenditure is disallowed in the year of accrual and allowed only in the year of payment. I strongly advise businesses to verify the MSME status of all suppliers on the Udyam Registration portal and align payment cycles accordingly. This provision has a cascading effect on advance tax calculations as well.
6. Presumptive Taxation — 44AD, 44ADA, 44AE
Presumptive taxation schemes allow small businesses and professionals to declare income at a prescribed percentage of turnover or receipts without maintaining detailed books of accounts:
| Parameter | Section 44AD (Business) | Section 44ADA (Profession) | Section 44AE (Goods Carriage) |
|---|---|---|---|
| Eligible persons | Resident individuals, HUFs, partnership firms (not LLPs above limit) | Resident individuals and partnership firms in specified professions | Any person owning up to 10 goods carriages |
| Turnover/receipts limit (95%+ digital) | ₹3,00,00,000 | ₹75,00,000 | N/A — vehicle count limit |
| Turnover/receipts limit (otherwise) | ₹2,00,00,000 | ₹50,00,000 | N/A |
| Deemed income rate | 8% of non-digital receipts + 6% of digital receipts | 50% of gross receipts | ₹1,000/ton/month (heavy) or ₹7,500/month (other vehicles) |
| Books of accounts required? | No (if income declared at or above presumptive rate) | No (if income declared at or above 50%) | No |
| Tax audit required? | No (unless income declared below presumptive rate and total income exceeds basic exemption) | No (unless income declared below 50%) | No |
| Advance tax | Entire tax payable by 15 March in single instalment | Entire tax payable by 15 March in single instalment | Entire tax payable by 15 March in single instalment |
| Depreciation | Deemed to have been allowed; WDV adjusted accordingly | Deemed to have been allowed | Deemed to have been allowed |
Opting out consequences: If a taxpayer opts for presumptive taxation under 44AD and subsequently opts out, they cannot use 44AD for the next 5 assessment years and must maintain books of accounts and get a tax audit done if turnover exceeds the prescribed threshold. This lock-in does not apply to 44ADA or 44AE. For more details on how presumptive income interacts with Chapter VI-A deductions, note that deductions are available from the presumptive income — the income declared is treated as the net income from which further deductions can be claimed.
7. Books of Account Requirements
Under the Income Tax Act 2025, the following persons must maintain books of accounts:
- Business: If income from business exceeds ₹2,50,000 or total sales/turnover/gross receipts exceed ₹25,00,000 in any of the 3 immediately preceding previous years
- Profession: If gross receipts exceed ₹1,50,000 in any of the 3 immediately preceding previous years
- New business/profession: If income is likely to exceed ₹1,20,000 or turnover is likely to exceed ₹10,00,000 in the first year
Books must include: cash book, journal, ledger, copies of bills (above ₹25 for retail, above ₹50 for others), original bills/vouchers for expenditure, and stock register (for businesses dealing in goods). Books must be maintained at the principal place of business and retained for 6 years from the end of the relevant AY (or 10 years in transfer pricing cases). Professionals must additionally maintain a daily case register and copies of bills exceeding the prescribed threshold.
8. Tax Audit — Thresholds and Compliance
| Category | Tax Audit Threshold | Conditions/Exceptions |
|---|---|---|
| Business — general | Turnover exceeds ₹1,00,00,000 | Standard threshold for all businesses |
| Business — 95% digital transactions | Turnover exceeds ₹10,00,00,000 | If 95% or more of total receipts AND payments are through banking channels (accounts, UPI, cards, NEFT, RTGS) |
| Profession | Gross receipts exceed ₹50,00,000 | Applicable to all specified professions |
| Presumptive taxation — income declared below deemed rate | Audit required if total income exceeds basic exemption limit | Penalty situation: declaring lower income triggers audit + books requirement |
The tax audit report must be furnished electronically in the prescribed form (Form 3CA/3CB with Form 3CD) before the due date of filing the income tax return. For assessees subject to tax audit, the ITR due date is 31 October of the assessment year (instead of 31 July for non-audit cases). Failure to get the tax audit done attracts a penalty of 0.5% of turnover or ₹1,50,000, whichever is lower.
9. Deemed Profits — Recovery and Balancing Charge
Certain receipts are treated as deemed business income even though they may not arise from current business operations:
9.1 Recovery of Bad Debts (Section 41(1) equivalent)
If a deduction was allowed in an earlier year for a bad debt or trading loss, and the amount is subsequently recovered, it is taxable as business income in the year of recovery — even if the business no longer exists.
9.2 Balancing Charge on Sale of Depreciable Assets
When assets in a block are sold and the sale proceeds exceed the WDV of the entire block, the excess (short-term capital gain) is taxable. If sale proceeds are less than the WDV, the difference remains in the block for future depreciation. If the block becomes empty (all assets sold), the deficit is a short-term capital loss. This is treated as capital gains, not business income.
9.3 Unexplained Cash Credits and Investments
Sums credited in the books of accounts for which the source is not satisfactorily explained, or investments not recorded in books, are deemed income taxable at 60% flat rate (plus surcharge at 25% and cess at 4%), effectively 78.72%. No deduction for any expenditure or allowance is permitted against such deemed income.
10. Speculative vs Non-Speculative Business
A speculative transaction is a transaction for the purchase and sale of any commodity (including stocks and shares) which is periodically or ultimately settled otherwise than by actual delivery or transfer of the commodity or scrips. Key rules:
- Loss from speculative business can be set off only against speculative business income — not against non-speculative business or any other head
- Speculative loss can be carried forward for 4 assessment years
- Non-speculative business loss can be set off against any head (except salary under new regime) and carried forward for 8 assessment years
- Transactions in derivatives (futures and options) on recognised stock exchanges are specifically excluded from the definition of speculative transactions — they are treated as non-speculative business income
- Hedging transactions by commodity dealers are also excluded from speculative classification
For set-off and carry-forward rules applicable to business losses, speculative losses, and unabsorbed depreciation, the priority of set-off is: current year business income first, then other heads (except salary under new regime), then brought-forward losses in order of their age.
11. Changes from the 1961 Act
- Enhanced presumptive limits: 44AD limit raised to ₹3 crore (from ₹2 crore) for digital businesses; 44ADA raised to ₹75 lakh (from ₹50 lakh) for digital professionals — these changes from Budget 2023 are codified in the 2025 Act
- MSME payment disallowance: Section 43B(h) equivalent provisions making payments to MSME suppliers within 45 days mandatory for tax deductibility are now part of the permanent statute
- Tax audit digital threshold: The ₹10 crore audit-free limit for 95%+ digital businesses is confirmed as a permanent provision (was introduced temporarily in 2020)
- Simplified depreciation schedule: The depreciation rates table is consolidated and made more accessible, though the actual rates remain unchanged
- Rationalised provisions: Multiple scattered provisions relating to business deductions (sections 30–37 of the 1961 Act) have been consolidated into a more logical framework
- Startup deductions: Section 80-IAC equivalent benefits for eligible startups (100% deduction for 3 of 10 years) are carried forward into the new Act
- Cash expense limit: The ₹10,000 per-person per-day cash payment limit for deductibility is retained unchanged
- Depreciation is mandatory under WDV method — claim it every year regardless of profit or loss to preserve the correct block value
- Ensure TDS compliance on all payments — 30% disallowance for TDS defaults can significantly inflate taxable income
- Section 43B payments (PF, ESI, bonus, MSME payments) must be made before the ITR due date for deductibility
- Presumptive taxation under 44AD (8%/6% of turnover) eliminates books and audit requirements for small businesses below ₹2–3 crore
- Tax audit threshold is ₹10 crore for businesses with 95%+ digital transactions — maintain digital payment records carefully
- File ITR before the due date to carry forward business losses; speculative loss carry-forward is limited to 4 years
- For NRIs with business income in India, the income must be computed as per Indian tax provisions with DTAA benefits where applicable
Frequently Asked Questions
What is the difference between business and profession under the Income Tax Act 2025?
Business covers trade, commerce, manufacturing, and any adventure in the nature of trade. Profession covers vocations requiring specialised intellectual skill — law, medicine, accountancy, engineering, architecture, etc. Both are taxed under the same head, but different presumptive taxation limits apply: 44AD for businesses (₹2–3 crore) and 44ADA for professions (₹50–75 lakh).
What is the tax audit threshold under the Income Tax Act 2025?
Tax audit is required if business turnover exceeds ₹1 crore. If 95% or more of receipts and payments are through banking channels, the threshold rises to ₹10 crore. For professionals, audit is required above ₹50 lakh gross receipts. Failure to get audited attracts a penalty of 0.5% of turnover or ₹1.5 lakh, whichever is lower.
What are the depreciation rates under the Income Tax Act 2025?
Key WDV rates are: buildings 5–10%, furniture 10%, general plant and machinery 15%, motor vehicles 15%, computers and software 40%, intangible assets 25%, and energy-saving devices 40%. Additional depreciation of 20% is available on new P&M for manufacturing businesses. If an asset is used for less than 180 days, only 50% of the normal rate applies in that year.
What is presumptive taxation under Section 44AD?
Under 44AD, eligible businesses with turnover up to ₹3 crore (95%+ digital) or ₹2 crore (otherwise) can declare income at 8% of non-digital receipts and 6% of digital receipts without maintaining books. Resident individuals, HUFs, and partnership firms are eligible. Companies and LLPs above the turnover limit cannot opt for this scheme.
What is Section 44ADA for professionals?
Section 44ADA allows professionals with gross receipts up to ₹75 lakh (95%+ digital) or ₹50 lakh (otherwise) to declare 50% of gross receipts as income. This covers legal, medical, engineering, accountancy, technical consultancy, interior decoration, and other notified professions. No books or audit are required if income is declared at or above 50%.
What is Section 43B and its impact on deductions?
Section 43B mandates that certain expenses — including taxes, PF/ESI contributions, bonus, bank interest, leave encashment, and MSME supplier payments — are deductible only when actually paid, not merely accrued or provided. The payment must be made before the ITR due date for the deduction to be allowed in that year.
What expenses are disallowed under Section 40(a)?
If TDS was required on a payment but not deducted, or deducted but not deposited before the ITR due date, 30% of the expenditure is disallowed. For payments to non-residents without TDS, 100% is disallowed. This covers rent, professional fees, commission, contract payments, interest, and all other TDS-attracting expenses. The disallowed amount is allowed in the year TDS is actually deposited.
What is the presumptive scheme for goods carriage operators?
Under Section 44AE, a person owning up to 10 goods carriages can declare income at ₹1,000 per ton of gross vehicle weight per month for heavy goods vehicles, or ₹7,500 per month for other vehicles. No books of accounts or tax audit are required. The taxpayer can declare higher income than these deemed rates.
Can a business loss be set off against salary income?
Under the old regime, non-speculative business loss can be set off against income from any head including salary. Under the new regime, business loss set-off against salary is restricted. Speculative business loss can only be set off against speculative business income under both regimes. Unabsorbed non-speculative business loss is carried forward for 8 years; speculative loss for 4 years.
What are the books of account requirements under the 2025 Act?
For businesses, books are required if income exceeds ₹2.5 lakh or turnover exceeds ₹25 lakh in any of the 3 preceding years. For professionals, the threshold is gross receipts exceeding ₹1.5 lakh. Books must be retained for 6 years (10 years for transfer pricing cases). Presumptive taxation assessees opting for the prescribed rate are exempt from maintaining books.
Disclaimer: This article is for educational purposes and does not constitute professional tax advice. Tax laws are subject to amendments and judicial interpretation. Consult a qualified Chartered Accountant for advice specific to your situation. For professional assistance, contact Virtual Auditor.
