Published: April 1, 2026 | Updated: April 15, 2026 | By CA V. Viswanathan, FCA, ACS, CFE, IBBI RV

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.

Definition — Profits and Gains of Business or Profession (PGBP): Under the Income-tax Act, 2025, PGBP is the profit or gain of any business or profession which was carried on by the assessee at any time during the tax year, computed by deducting from its revenue all expenses that are permissible under the Act and adding back items that are disallowed. It includes profits from any adventure in the nature of trade, commerce or manufacture.

Featured Answer — How is business income computed under the 2025 Act?

Start with the net profit per the audited profit & loss account. Add back inadmissible expenses (income-tax, personal expenses, Section 43B items unpaid, TDS-defaulted expenses, Section 40A(3) cash payments, Section 40A(2) excessive related-party payments, depreciation per books). Deduct admissible expenses and allowances not debited to P&L (income-tax depreciation, pre-paid 43B items, weighted deductions, etc.). Adjust for deemed income, bad debts recovered, balancing charge on asset sales. The result is Profits and Gains of Business or Profession, chargeable under that head. Presumptive taxpayers under the Section 44AD equivalent bypass this entire computation and declare income at a fixed percentage of turnover.

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:

3. Allowable expenses

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

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:

Asset WDV rate Notes
Buildings (non-residential) 10% Factories, offices, godowns
Residential buildings 5% Let out to employees etc.
Furniture and fittings 10% Including electrical fittings
Plant and machinery (general) 15% Factory machinery etc.
Computers and software 40% Data-processing equipment
Motor cars (personal use by employees) 15% 30% if used for hire
Intangible assets (patents, know-how, copyrights, trademarks, goodwill) 25% Goodwill excluded after 2021
Energy-saving and pollution-control equipment 40% Specified assets

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:

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:

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

Category Tax audit threshold
Business (general) Rs 1 crore turnover
Business (digital – cash receipts & payments ≤ 5%) Rs 10 crore turnover
Profession Rs 75 lakh gross receipts
Presumptive under 44AD / 44ADA with profit below presumed rate & income > basic exemption Mandatory audit
Presumptive under 44AE with profit below presumed rate Mandatory 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

Type of loss Carry-forward period Set-off against
Non-speculative business loss 8 tax years Any business profit (non-speculative)
Speculation loss 4 tax years Speculation profit only
Unabsorbed depreciation Indefinite Any head except salary
Specified business loss (35AD) Indefinite Specified business profit only
Loss from owning and maintaining race horses 4 tax years Same activity only

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:

11. Worked example

Example — Manufacturing proprietor, tax year 2026-27
Kavita runs a proprietary manufacturing unit. Turnover Rs 6 crore (all cheque/UPI receipts, no cash). Net profit per P&L = Rs 85,00,000.

Adjustments:
Add back: Depreciation per books Rs 10,00,000; Income-tax provision Rs 2,00,000; Personal expenses debited Rs 50,000; GST paid after due date of return Rs 80,000 (disallowed); Interest to bank unpaid Rs 1,20,000 (Section 43B); Cash payment Rs 15,000 to contractor (disallowed under Section 40A(3)).
Less: Tax depreciation (block WDV) Rs 12,00,000; Additional depreciation on new machinery Rs 4,00,000 (20% of Rs 20 lakh new plant installed).

Computation:
Net profit per books 85,00,000
Add: Book depreciation 10,00,000 + Income tax 2,00,000 + Personal 50,000 + GST unpaid 80,000 + Bank interest unpaid 1,20,000 + Cash 15,000 = 14,65,000
Subtotal 99,65,000
Less: Tax depreciation 12,00,000 + Additional depreciation 4,00,000 = 16,00,000
Taxable PGBP = Rs 83,65,000

Since turnover is Rs 6 crore and cash < 5 per cent of receipts, Kavita falls under the Rs 10 crore digital audit threshold — audit required (above Rs 1 crore general). She is not eligible for Section 44AD (individual firm, but turnover within Rs 3 crore threshold would have allowed it). Books to be audited, Form 3CD filed by 30 September 2027 (or per the extended date).

Expert Insight

CA V. Viswanathan: The PGBP head is where my practice spends the most time during tax season. Three issues dominate client conversations on the 2025 Act. First, the MSE payment rule under the Section 43B equivalent is still not fully understood by many SMEs. Delayed payments to MSE vendors are disallowed in the year they are incurred and only allowed in the year of actual payment — with no “pay before return filing” escape. This can create a nasty timing mismatch, especially for businesses with 60-90 day credit cycles. My advice: either pay your MSE vendors within 45 days, or restructure the vendor base. Second, the Rs 10 crore digital tax audit threshold is a real gift to clean-books SMEs. Clients who historically got their books audited at Rs 1.1 crore turnover because they thought the audit was mandatory can now skip the audit up to Rs 10 crore if their cash footprint is under 5 per cent on both sides. But the cash test is cumulative, not transaction-wise, and even one big cash sale can push a business out of eligibility — watch for festival season. Third, the opt-out rule for presumptive taxation under the Section 44AD equivalent is a five-year lock-out. I have seen clients jump in and out of 44AD without realising that once they declare actual profits below the 8 per cent mark, they cannot return to presumptive for five tax years. Plan the regime choice over a rolling five-year horizon, not year by year.

Key Takeaways

Frequently Asked Questions

When does the Income-tax Act, 2025 start applying to business income?

The Act (30 of 2025) received Presidential assent on 21 August 2025 and commences on 1 April 2026. Business and professional income from 1 April 2026 is computed under the 2025 Act; first tax year is 2026-27.

What is the tax audit threshold under the 2025 Act?

Rs 1 crore for general business, Rs 10 crore for predominantly digital business (cash receipts and payments each under 5 per cent), and Rs 75 lakh for professionals. Presumptive taxpayers declaring below the presumed rate with income above the basic exemption must also be audited.

What is presumptive taxation under Section 44AD equivalent?

Resident individuals, HUFs and firms (other than LLPs) with turnover up to Rs 3 crore can declare income at 8 per cent (6 per cent for banking receipts). The Rs 3 crore ceiling applies only if cash receipts are under 5 per cent.

Are depreciation rates the same under the 2025 Act?

Yes. The block-of-assets concept and the WDV rates are retained. Common rates: computers 40 per cent, plant & machinery 15 per cent, furniture 10 per cent, non-residential buildings 10 per cent. Additional depreciation of 20 per cent on new manufacturing plant is available.

Is Section 43B continued in the 2025 Act?

Yes. Statutory dues (GST, PF, ESI, bonus, leave encashment, bank/NBFC interest, etc.) are allowed only on actual payment. Payments to MSEs beyond the 15/45 day limit are also allowed only in the year of actual payment.

What expenses are allowable under Section 30-37 equivalents?

Rent, rates, taxes, repairs and insurance for buildings; repairs and insurance of plant and machinery; depreciation; bad debts; employer PF/gratuity contributions; scientific research; and any other expense laid out wholly and exclusively for business (Section 37(1) equivalent).

What are the disallowances under Sections 40/40A/43B equivalents?

Excess partner remuneration, unreasonable related-party payments, cash payments above Rs 10,000, expenses on which TDS was not deducted/paid, and unpaid 43B items. Each has specific conditions and some have a reversal mechanism in the year of compliance.

Are business losses carried forward under the 2025 Act?

Yes. Non-speculative business loss: 8 years against business profits. Speculation loss: 4 years against speculation profits. Unabsorbed depreciation: indefinite, against any head except salary. Specified business loss: indefinite, only against specified-business profit.

What is the tax rate for domestic companies?

Default 30 per cent (25 per cent if turnover ≤ Rs 400 crore). Concessional 22 per cent under Section 115BAA equivalent (effective 25.17 per cent with surcharge and cess) or 15 per cent under Section 115BAB equivalent for new manufacturers (effective 17.16 per cent). MAT at 15 per cent of book profits.

What books of account must be maintained?

Specified professionals with gross receipts above Rs 1,50,000 must maintain prescribed books. General business: income above Rs 2,50,000 or turnover above Rs 25 lakh in any of three preceding years. Books must be retained for 6 years from the end of the tax year.

Is Section 44ADA available to companies and LLPs?

No. The Section 44ADA presumptive scheme for professionals is available only to resident individuals, HUFs and firms (other than LLPs). Companies, LLPs and non-residents are excluded.

How is interest on capital borrowed for business treated?

Deductible as revenue expense for the period after the asset is put to use. Interest for the pre-commissioning period is to be capitalised to the asset. Interest on bank/NBFC loans is subject to the Section 43B payment-basis rule.

How are payments to related parties treated?

Under the Section 40A(2) equivalent, payments to specified relatives, directors or substantial interest holders in excess of fair market value are disallowed to the extent of the excess.

Can opening WDV from the 1961 Act carry forward to the 2025 Act?

Yes. The Chapter XXIII transitional provisions of the 2025 Act treat the WDV of each block of assets as on 31 March 2026 under the 1961 Act as the opening WDV for tax year 2026-27. Brought-forward losses and unabsorbed depreciation are similarly preserved.

For a personalised business tax review for tax year 2026-27, contact our team at virtualauditor.in/contact-us or call +91 99622 60333.

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