Introduction
Income from business and profession is a crucial category under the Indian Income Tax Act, encompassing earnings generated by individuals and entities through their business activities, professional practices, or vocational pursuits. This head of income is defined with precision under the Act to ensure the correct application of tax provisions and deductions.
In this blog, we’ll explore the meaning, scope, and various aspects of income from business and profession, along with practical examples and FAQs to simplify this concept for taxpayers.
Definition and Scope
- What is Business?
As per Section 2(13) of the Income Tax Act, business includes any trade, commerce, or manufacture, or any adventure or concern in the nature of trade, commerce, or manufacture.Key aspects of business income:- It must involve continuous and systematic activities.
- It includes rendering services for a profit motive.
- Even activities like leasing commercial assets or earning from speculative transactions can qualify as business income.
- What is Profession?
Under Section 2(36), profession includes vocations requiring specialized knowledge, intellectual skills, or manual abilities. Examples include doctors, lawyers, accountants, architects, and consultants.A profession differs from a business as it relies on individual expertise and skill rather than trade or manufacturing. - What is Vocation?
Vocation refers to a way of earning a livelihood, such as teaching, art, or any other pursuit, even if not requiring specialized education.
Income Chargeable Under This Head
Section 28 of the Income Tax Act specifies various types of incomes chargeable under the head “Profits and Gains of Business or Profession,” including:
- Profits from Business or Profession:
- Earnings from running a business or practicing a profession during the previous financial year.
- Compensation:
- Payments received for terminating or modifying business agreements.
- Export Incentives:
- Income from duty drawbacks or sales of import/export licenses.
- Value of Benefits or Perquisites:
- Non-monetary benefits, such as rent-free accommodation or a company vehicle, are taxable as income.
- Keyman Insurance Policy Proceeds:
- Any sum received under a Keyman insurance policy, including bonuses, is taxable.
- Speculative Transactions:
- Income from speculative trades, such as stock or commodity trading without delivery, is chargeable.
- Fair Market Value of Converted Inventory:
- When inventory is converted into a capital asset, its fair market value is taxable under this head.
How Is Income Computed?
Income from business or profession is computed by deducting allowable expenses from gross receipts. The calculation follows these steps:
- Determine Gross Receipts:
- Total revenue from sales, services, or professional fees.
- Deduct Allowable Expenses:
- Rent, salaries, depreciation, repairs, interest on borrowed capital, etc.
- Adjust for Non-Allowable Deductions:
- Expenses like personal expenditures or cash payments exceeding ₹20,000 (not via bank) are disallowed.
- Include Other Incomes:
- Such as benefits, speculative profits, or income from the sale of business assets.
Examples of Income from Business or Profession
- Business Income:
- A retailer earns ₹10,00,000 from selling goods. After deducting rent, salaries, and other expenses, the net profit of ₹7,00,000 is taxable under this head.
- Professional Income:
- A lawyer earns ₹15,00,000 annually. Expenses like office rent and staff salaries amounting to ₹5,00,000 are deductible, making ₹10,00,000 taxable.
- Speculative Income:
- A stock trader earns ₹1,00,000 by buying and selling derivatives without actual delivery. This is treated as business income.
- Leasing Income:
- Renting out machinery for ₹2,00,000 annually qualifies as business income.
Key Points to Remember
- Books of Accounts:
Professionals with income exceeding ₹2,50,000 must maintain proper books of accounts under Section 44AA. - Audit Requirement:
Businesses with turnover exceeding ₹1 crore (or ₹50 lakhs for professionals) may require a tax audit under Section 44AB. - Presumptive Taxation:
Small businesses and professionals can opt for presumptive taxation under Sections 44AD and 44ADA, simplifying the process. - Disallowed Expenses:
Personal expenses, fines, or penalties cannot be claimed as deductions.
FAQs
1. Is rental income always taxable as business income?
No, rental income from house property is taxable under the head “Income from House Property,” unless the property is used for business purposes.
2. Can I claim depreciation on assets used in my business?
Yes, depreciation on business assets is deductible under Section 32.
3. Is freelance income taxable under business and profession?
Yes, freelance income from services like content writing, photography, or consulting is taxable under this head.
4. Can I deduct family expenses from my business income?
No, personal or family expenses are not allowed as deductions.
5. Do I need to file a separate return for business income?
No, business or professional income is reported in your regular income tax return under the applicable ITR form.
Conclusion
Understanding Income from Business and Profession is essential for taxpayers involved in trade or professions. This head of income provides clarity on taxable earnings and available deductions, ensuring businesses and professionals can optimize their tax liabilities.
For further details or assistance, consult a tax expert.
Additional Resources
Learn more about Tax Provisions on the official Income Tax India website.
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