Profits and Gains of Business or Profession Under the Income-tax Act, 2025

Last Updated: 15 April 2026  |  Applicable From: Tax Year 2026-27 (1 April 2026 onwards)  |  Reference: Income-tax Act, 2025 (30 of 2025), as amended by Finance Act, 2026

The PGBP head is the most complex of the five heads of income and the one most affected by Chapter IV of the Income-tax Act, 2025. While the linguistic rewrite of Sections 28 to 44 of the 1961 Act has simplified the language, the substantive rules around depreciation, allowable expenses, disallowances, presumptive taxation and tax audit have been retained with minor rationalisations. Brought-forward losses, unabsorbed depreciation, WDV of block of assets and pending incentives all flow into the new Act through the Chapter XXIII transitional provisions. This guide explains how businesses and professionals compute taxable income under the 2025 Act for tax year 2026-27, with worked examples, the complete allowable-expenses checklist, the Section 43B payment-basis rules, and the tax audit and presumptive taxation thresholds as amended by Finance Act, 2026.

Table of Contents

1. Charging scheme under the 2025 Act
2. What is charged as PGBP
3. Allowable expenses
4. Depreciation and block of assets
5. Section 43B and MSE payments
6. Disallowances under Sections 40/40A
7. Presumptive taxation (44AD, 44ADA, 44AE)
8. Books of account and tax audit
9. Carry forward and set off of losses
10. Corporate tax rates and MAT
11. Worked example
12. Related articles in the series
13. Expert Insight
14. Key Takeaways
15. Frequently Asked Questions

1. Charging scheme under the 2025 Act

Chapter IV of the Income-tax Act, 2025 retains the five-head structure. The PGBP head in the 2025 Act corresponds to Sections 28 to 44DB of the 1961 Act. The computational framework is unchanged in substance: net profit as per books is adjusted for tax-specific additions and deductions to arrive at taxable business income. The major changes are linguistic and structural — the Act presents provisions in a table-and-sub-clause format rather than the dense prose of the 1961 Act — and a handful of rate and threshold amendments aligned with Finance Act, 2026.

Terminology is the critical watchword: “previous year” and “assessment year” are replaced by a single tax year (1 April to 31 March). Tax year 2026-27 is the first tax year under the new Act. Transitional provisions in Chapter XXIII confirm that pending proceedings under the 1961 Act continue under that Act, and that brought-forward losses, unabsorbed depreciation and WDV of block of assets flow into the 2025 Act from 1 April 2026.

2. What is charged as PGBP

The scope of income charged under this head (Section 28 equivalent) includes:

• Profits and gains of any business or profession carried on at any time during the tax year
• Any compensation due to or received by managing agents, directors, or agency terminees
• Income derived from specific services performed for members of a trade or profession
• Export incentives (cash compensatory support, drawback, DEPB/RoDTEP credits)
• Value of any benefit or perquisite, whether convertible into money or not, arising from business or exercise of profession (with TDS under the Section 194R equivalent at 10 per cent)
• Interest, salary, bonus, commission or remuneration due to or received by a partner from a firm (subject to the Section 40(b) equivalent limits)
• Sum received under a keyman insurance policy, to the extent not already charged as salary
• Income from speculation business (separately computed and set-off)
• Sum received on conversion of stock-in-trade into capital asset, and vice versa

3. Allowable expenses

The Act prescribes specific deductions followed by a residual catch-all. Commonly allowed expenses include:

• Rent, rates, repairs and insurance of buildings used for business (Section 30 equivalent)
• Current repairs and insurance of plant, machinery and furniture (Section 31 equivalent)
• Depreciation on capital assets (Section 32 equivalent) — see next section
• Investment allowance and additional depreciation on new plant & machinery (20 per cent for manufacturing, subject to conditions)
• Tea/coffee/rubber development allowances (Section 33AB, 33ABA equivalents)
• Scientific research expenditure (Section 35 equivalent) — in-house R&D, contributions to approved institutions, and weighted deductions (where still available)
• Amortisation of preliminary expenses (Section 35D equivalent) over 5 years
• Amortisation of VRS compensation over 5 years (Section 35DDA equivalent)
• Telecom licence fees amortisation (Section 35ABB equivalent)
• Specified business deduction under Section 35AD equivalent — 100 per cent capital expenditure (excluding land, goodwill and financial instruments) for cold-chain, warehousing, fertiliser, hospitals, etc.
• Insurance premium on employees’ health (Section 36(1)(ib) equivalent)
• Employer contribution to recognised PF, approved gratuity fund, approved superannuation fund, NPS
• Bad debts actually written off in the books (Section 36(1)(vii) equivalent)
• Banking cash transaction tax, securities transaction tax, commodities transaction tax paid in the course of business
• Interest on borrowed capital for business purposes (Section 36(1)(iii) equivalent) — subject to capitalisation rule for pre-commissioning interest
• Any other expenditure wholly and exclusively laid out or expended for the purposes of business or profession, and not being of capital or personal nature (the residual Section 37(1) equivalent)

Penalties and fines for contravention of law, CSR expenditure under the Companies Act, 2013 (treated as application of profit, not expense), and expenditure on advertisement in souvenirs or brochures of political parties are expressly disallowed.

4. Depreciation and block of assets

The Section 32 equivalent retains the block of assets concept: assets of the same class falling within the same percentage rate are grouped into a single block and depreciation is computed on the written-down value of the block. The common WDV rates (unchanged from the 1961 Act) are:

Half-year convention applies to assets put to use for less than 180 days in the tax year (half of normal rate). Additional depreciation of 20 per cent on actual cost of new plant and machinery is available for manufacturing concerns in the year of installation. Unabsorbed depreciation is carried forward indefinitely and set off against any head of income other than salary.

5. Section 43B and MSE payments

The Section 43B equivalent under the 2025 Act preserves the rule that certain expenses are allowed only in the tax year in which they are actually paid, regardless of the method of accounting. These include:

• Taxes, duties, cess or fee under any law for the time being in force (GST, customs, excise, municipal taxes, etc.)
• Employer contribution to PF, superannuation fund, gratuity fund or any other fund for the welfare of employees
• Bonus or commission to employees
• Leave encashment payable to employees
• Interest on loan from public financial institutions, state financial corporations, scheduled banks and NBFCs
• Payments due to Micro and Small Enterprises (MSEs) beyond 15 days (or 45 days where a written agreement exists) — the Finance Act, 2023 rule retained

Subject to this, if the expense is actually paid on or before the due date of filing the return for the tax year, the deduction is allowed in that tax year. The MSE rule is a crucial exception: payments to MSEs delayed beyond the prescribed 15/45-day limit are allowed only in the tax year of actual payment, with no due-date-of-return escape. This materially affects working capital planning for businesses with MSE vendors.

6. Disallowances under Sections 40/40A

Even if an expense is otherwise allowable, it may be disallowed under specific provisions:

• Section 40(a) equivalent: Expenses on which TDS is required but not deducted (or deducted but not deposited by the due date of the return) are disallowed to the extent of 30 per cent for resident payees, and 100 per cent for non-resident payees. The disallowance is reversed in the year of actual payment / TDS deposit.
• Section 40(b) equivalent: Interest, salary, bonus, commission or remuneration to partners of a firm in excess of prescribed limits is disallowed. Remuneration limits for working partners: on first Rs 3 lakh of book profit, higher of Rs 1.5 lakh or 90 per cent; on the balance, 60 per cent. Interest is capped at 12 per cent per annum simple.
• Section 40A(2) equivalent: Payments to specified relatives and related parties in excess of fair market value are disallowed to the extent of the excess.
• Section 40A(3) equivalent: Cash payments exceeding Rs 10,000 to a single person in a single day are disallowed. The limit is Rs 35,000 for payment to a goods carrier. Exceptions for specified situations (agricultural purchase from cultivators, village banks, emergencies, etc.) are retained.
• Section 40A(7) equivalent: Provision for gratuity (other than contribution to approved fund) is disallowed.
• Section 40A(9) equivalent: Contribution to any non-statutory, non-approved fund for employees is disallowed.
• Section 43B equivalent: As discussed above.

7. Presumptive taxation (44AD, 44ADA, 44AE)

Section 44AD equivalent — eligible businesses

Resident individuals, HUFs and firms (other than LLPs) carrying on any business other than the business of plying, hiring or leasing goods carriages, can declare income at 8 per cent of turnover (or 6 per cent for amounts received through banking channels or electronic modes) up to a turnover of Rs 3 crore. The Rs 3 crore threshold (enhanced from Rs 2 crore by Finance Act, 2023) is available only if total cash receipts do not exceed 5 per cent of total receipts. Otherwise, the Rs 2 crore limit applies.

Section 44ADA equivalent — professionals

Resident individuals, HUFs and firms (other than LLPs) in specified professions (legal, medical, engineering, architectural, accountancy, technical consultancy, interior decoration, film, etc.) can declare 50 per cent of gross receipts as income, up to gross receipts of Rs 75 lakh (enhanced from Rs 50 lakh in 2023). The Rs 75 lakh threshold is available only if cash receipts do not exceed 5 per cent of total receipts.

Section 44AE equivalent — goods carriages

Persons owning up to 10 goods carriages declare income at Rs 1,000 per ton of gross vehicle weight per month for heavy goods vehicles (exceeding 12,000 kg) and Rs 7,500 per month for other vehicles. No turnover ceiling applies.

Common rules

Opting for presumptive taxation exempts the taxpayer from maintaining books of account and from tax audit. Depreciation is deemed allowed. No further deductions under Chapter VI-A (other than those permitted under the new regime) are available from the presumptive income. If a presumptive taxpayer declares profit below the presumed rate and has total income exceeding the basic exemption limit, they must maintain books and get audited. Opting out of presumptive taxation under Section 44AD triggers a five-year lock-out (cannot re-enter for 5 tax years).

8. Books of account and tax audit

Audit reports are filed in Form 3CA/3CB and 3CD, typically one month before the due date of return filing for audit cases (31 October following the tax year). Penalty for failure to get audited is 0.5 per cent of turnover or Rs 1,50,000, whichever is lower.

9. Carry forward and set off of losses

Carry forward is available only if the return is filed by the due date. An exception applies to unabsorbed depreciation and house-property losses, which can be carried forward even if the return is belated.

10. Corporate tax rates and MAT

Companies compute their PGBP income under Chapter IV like any other taxpayer, but face specific corporate rates. The 2025 Act preserves the concessional tax regimes:

• Default rate: 30 per cent for domestic companies with turnover above Rs 400 crore; 25 per cent if turnover in the previous year did not exceed Rs 400 crore.
• Section 115BAA equivalent: 22 per cent (plus 10 per cent surcharge and 4 per cent cess = 25.17 per cent effective) for domestic companies not claiming specified exemptions.
• Section 115BAB equivalent: 15 per cent (plus 10 per cent surcharge and 4 per cent cess = 17.16 per cent effective) for new domestic manufacturing companies incorporated on or after 1 October 2019 and commencing production by the specified sunset date, subject to conditions.
• Foreign companies: 35 per cent (reduced from 40 per cent by Finance Act, 2024 and retained).
• MAT: 15 per cent of book profits for companies not opting for the 22 per cent / 15 per cent regimes. MAT credit carried forward 15 years.
• AMT (non-corporate, claiming specified deductions): 18.5 per cent of adjusted total income.

11. Worked example

12. Related articles in the series

• Salary Income under the Income-tax Act, 2025
• House Property Income under the 2025 Act
• Capital Gains Tax under the 2025 Act
• Income from Other Sources under the 2025 Act
• Presumptive taxation under Section 44AD equivalent
• Tax audit threshold and Form 3CD under the 2025 Act

Expert Insight

Key Takeaways

• Income-tax Act, 2025 received assent on 21 August 2025 and commences 1 April 2026; first tax year is 2026-27.
• PGBP computation mirrors the 1961 Act: net profit adjusted by additions and deductions.
• Tax audit threshold: Rs 1 crore business / Rs 10 crore digital / Rs 75 lakh profession.
• Section 44AD presumptive: 8 per cent (6 per cent digital) up to Rs 3 crore turnover (resident individuals, HUFs, firms).
• Section 44ADA presumptive: 50 per cent of gross receipts up to Rs 75 lakh for specified professions.
• Depreciation block-of-assets concept retained; additional 20 per cent depreciation for manufacturing continues.
• Section 43B payment-basis rule preserved, including MSE delayed-payment restriction.
• Unabsorbed depreciation carries forward indefinitely; business loss 8 tax years, speculation loss 4 years.
• Corporate rates retained: 22 per cent under Section 115BAA equivalent; 15 per cent for new manufacturing under 115BAB equivalent.
• Chapter XXIII transitional rules carry forward WDV, losses and unabsorbed depreciation from the 1961 Act.

Frequently Asked Questions

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