Introduction

The Income Tax Act, 1961, specifies distinct heads of income to categorize various forms of earnings for tax purposes. One such head is “Profits and Gains of Business or Profession,” which encompasses income from trade, commerce, or professional activities. Understanding what types of incomes fall under this head is essential for accurate tax filing and compliance. This blog will outline the types of incomes chargeable under this head, referencing Section 28 of the Income Tax Act.

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What Is Meant by ‘Profits and Gains of Business or Profession’?

This head includes income earned from:

1. Operating a business or practicing a profession.
2. Compensation or benefits received as part of business activities.
3. Earnings from speculative and non-speculative transactions.

Essentially, any systematic activity carried out with the intent of earning profits is chargeable under this head.

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Types of Incomes Chargeable Under This Head

As per Section 28, the following types of income are chargeable under “Profits and Gains of Business or Profession”:

1. Profits from Business or Profession

• Earnings from activities like trade, commerce, manufacturing, or providing professional services are taxable under this head.
• Example: A retail shop earning ₹10,00,000 annually after expenses.

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2. Compensation Received for Business Agreements

• Compensation received for terminating or modifying a business agreement is taxable.
• Example: A distributor receives ₹5,00,000 from a company for modifying their distribution rights.

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3. Value of Benefits or Perquisites

• Non-monetary benefits received during the course of business or profession are taxable.
• Example: A lawyer receiving a rent-free office space for legal services rendered.

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4. Speculative and Non-Speculative Income

• Income from speculative transactions, such as intraday stock trading, is chargeable under this head.
• Non-speculative income, such as earnings from derivatives trading, is also included.

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5. Keyman Insurance Policy Proceeds

• Any sum received under a Keyman Insurance Policy, including bonuses, is taxable.

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6. Fair Market Value of Converted Inventory

• When inventory is converted into a capital asset, the fair market value of the inventory on the conversion date is taxable.
• Example: A trader converts ₹20,00,000 worth of stock into capital assets; this amount is chargeable as business income.

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7. Export Incentives

• Profits from export-related benefits, such as duty drawbacks and transfer of import/export licenses, are taxable.

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8. Income of Trade or Professional Associations

• Earnings from specific services provided to members by trade or professional associations are taxable.

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9. Sum Received for Restrictive Covenants

• Any amount received for agreeing not to carry out certain business activities or share know-how is taxable.
• Example: A professional agrees not to consult a competitor in exchange for ₹1,00,000.

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10. Earnings from Leasing Commercial Assets

• Income from leasing commercial machinery or equipment is considered business income.

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11. Income from Insurance Compensation

• Compensation received for stock-in-trade damage or destruction is taxable under this head.

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Examples of Income Under ‘Profits and Gains of Business or Profession’

1. Professional Earnings:
   A lawyer earns ₹15,00,000 annually. After deducting office expenses, the net income is taxable under this head.
2. Stock Trading:
   A trader earns ₹2,00,000 from speculative intraday stock trading. This income is chargeable under “Profits and Gains of Business or Profession.”
3. Export Incentives:
   A business earns ₹5,00,000 from duty drawback schemes; this amount is taxable.

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Taxation of Incomes Under This Head

• Income under this head is taxed as per the applicable income tax slab rates for individuals, partnerships, or companies.
• Businesses and professionals can claim deductions for expenses such as rent, salaries, and depreciation, provided they are directly related to the income earned.

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FAQs

1. Is rental income from house property chargeable under this head?
No, rental income from house property is taxable under the head “Income from House Property” unless the property is used for business purposes.

2. Are freelance earnings chargeable under this head?
Yes, freelance income from activities like writing, photography, or consultancy is taxable under “Profits and Gains of Business or Profession.”

3. What expenses can be deducted from this income?
Expenses like office rent, staff salaries, interest on loans, and depreciation on business assets are deductible.

4. Are compensation amounts always taxable?
Yes, compensation for business-related agreements or restrictive covenants is taxable under this head.

5. Is speculative income taxed differently?
Speculative income is taxable under this head but may be subject to specific rules, such as restrictions on the carry forward of losses.

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Conclusion

The head “Profits and Gains of Business or Profession” under the Income Tax Act covers various types of incomes earned through business, professional services, and related activities. Understanding the classification of such incomes is crucial for proper tax compliance and optimizing deductions.

Additional Resources

Learn more about Tax Provisions on the official Income Tax India website.

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