Business & Profession Income - Sections 26 to 66 | Expenses, Depreciation & Presumptive Tax

Key Takeaways

• Section 26 of the Income Tax Act, 2025 (previously Section 28) charges profits and gains of business or profession, including export incentives, duty drawback, and keyman insurance proceeds.
• Expenses are allowed as deduction only if they are revenue in nature, incurred wholly and exclusively for business, and not capital expenditure.
• Section 58 (previously Section 44AD) allows businesses with turnover up to Rs. 3 crore to declare 6%/8% of turnover as income (no books required).
• Section 58 also applies to professionals (previously Section 44ADA) with gross receipts up to Rs. 75 lakhs (50% deemed profit).
• Key disallowances under Sections 36 and 37 (previously Sections 40, 40A, and 43B) can significantly increase taxable income if not planned properly.

What is Business Income? (Section 26 of the Income Tax Act, 2025, previously Section 28)

Section 26 is a comprehensive charging section. Income chargeable includes:

• Profits and gains from any business or profession
• Compensation for loss of agency, managing agency, or business
• Export incentives: duty drawback, profit on sale of import licences (DEPB/MEIS/RoDTEP)
• Benefits or perquisites arising from business
• Interest, salary, bonus, commission received by a partner from the firm
• Keyman insurance policy proceeds
• Income from speculative transactions (treated as separate business)
• Sum received under a non-compete agreement

Allowed Deductions (Sections 28 to 34 and related sections)

| Section (2025 Act) | Previously | Deduction | Key Condition | |--------------------|-----------|-----------|---------------| | 28 | 30 | Rent, rates, taxes, repairs of premises | Premises used for business | | 29 | 31 | Repairs and insurance of machinery | Must be used for business | | 33 | 32 | Depreciation | On tangible and intangible assets owned and used for business | | 45 | 35 | Scientific research expenditure | Revenue expenditure: 100%, Capital on in-house: 100% | | 27/30/31/32 | 36(1)(iii) | Interest on borrowed capital | Must be for business purposes, not for acquisition of asset until put to use | | 27 | 36(1)(va) | Employee's PF/ESI contribution | Only if deposited before due date under respective Act | | 27 | 36(1)(vii) | Bad debts written off | Must have been offered as income in earlier year | | 34 | 37(1) | General deduction | Any expenditure (not being capital or personal) wholly and exclusively for business |

Key Disallowances

Section 36(ia) of the Income Tax Act, 2025 (previously Section 40(a)(ia)) - TDS Default

Any payment to a resident on which TDS is deductible but not deducted, or deducted but not deposited within the prescribed time, is disallowed to the extent of 30% of the expenditure.

Section 36 of the Income Tax Act, 2025 (previously Section 40A(3)) - Cash Payments

Any expenditure exceeding Rs. 10,000 in a single day to a single person paid otherwise than by account payee cheque/draft/ECS is fully disallowed. Limit is Rs. 35,000 for transporters.

Section 37 of the Income Tax Act, 2025 (previously Section 43B) - Certain Deductions on Actual Payment Only

The following are allowed only on actual payment basis (not accrual):

• Tax, duty, cess, fee payable to Government
• Employer's contribution to PF, superannuation, gratuity
• Bonus or commission to employees
• Interest on loans from financial institutions/scheduled banks
• Leave encashment payable to employees
• Payments to Micro and Small Enterprises (Section 37 of the Income Tax Act, 2025, previously Section 43B(h)) - must be paid within time prescribed under MSMED Act (15/45 days)

Presumptive Taxation Schemes - Section 58 of the Income Tax Act, 2025 (previously Sections 44AD/44ADA/44AE)

| Scheme | Section (2025 Act) | Previously | Eligible Assessee | Turnover/Receipt Limit | Deemed Profit | |--------|-------------------|-----------|-------------------|----------------------|---------------| | Business | 58 | 44AD | Resident Individual, HUF, Firm (not LLP) | Rs. 3 crore (if cash receipts ≤ 5% of total) | 6% (digital) / 8% (cash) | | Profession | 58 | 44ADA | Resident assessee in specified profession | Rs. 75 lakhs (if cash receipts ≤ 5%) | 50% of gross receipts | | Goods carriage | 58 | 44AE | Any person owning up to 10 goods carriages | No turnover limit | Rs. 1,000/ton/day (heavy) or Rs. 7,500/vehicle/day (other) |

Specified professions under Section 58: Legal, medical, engineering, architecture, accountancy, technical consultancy, interior decoration, and any profession notified by CBDT.

Books of account requirements under Section 62 (previously Section 44AA) and Tax audit under Section 63 (previously Section 44AB) continue to apply in the same manner.

Landmark Judgement

Worked Example - Presumptive Taxation vs Regular

Mr. Suresh runs a retail electronics shop. Details for Tax Year 2025-26:

| Particulars | Amount (Rs.) | |------------|-------------| | Total turnover | 1,80,00,000 | | Cash receipts | 8,00,000 (< 5% of turnover) | | Digital receipts | 1,72,00,000 | | Actual expenses (rent, salary, purchases, etc.) | 1,62,00,000 | | Actual profit | 18,00,000 |

Option 1: Presumptive Taxation u/s 58 of the Income Tax Act, 2025

| Component | Calculation | Amount (Rs.) | |-----------|------------|-------------| | Digital receipts at 6% | 1,72,00,000 x 6% | 10,32,000 | | Cash receipts at 8% | 8,00,000 x 8% | 64,000 | | Deemed business income | | 10,96,000 |

Option 2: Regular Computation

Business income = Rs. 18,00,000 (turnover minus actual expenses, before depreciation and other adjustments).

Analysis: Presumptive taxation declares significantly lower income (Rs. 10.96 lakh vs Rs. 18 lakh). Mr. Suresh should opt for Section 58. However, if actual profit is lower than the deemed percentage, he can declare higher actual income or opt out (but must maintain books and get audit done under Section 63 if turnover exceeds Rs. 1 crore).

Expert Tip

Section Interconnect

• Also read: Chapter 8 - Set Off and Carry Forward of Losses (business losses can be carried forward for 8 years under Section 110; speculative losses have separate rules under Section 113)
• Also read: Chapter 10 - TDS, TCS & Advance Tax (TDS defaults under Section 36(ia) cause disallowance; presumptive taxpayers pay advance tax in one instalment)
• Also read: Chapter 6 - Capital Gains (depreciable assets sold attract Section 74 for computation of capital gains)

Frequently Asked Questions

Q1: Is audit mandatory for businesses opting for Section 58 (presumptive taxation)?

No. If you declare income at or above 6%/8% of turnover under Section 58 of the Income Tax Act, 2025, no audit under Section 63 (previously Section 44AB) is required. However, if you opt out of Section 58 and your turnover exceeds Rs. 1 crore (Rs. 10 crore if cash transactions ≤ 5%), audit becomes mandatory. Also, if you declare income lower than the presumptive rate, audit is mandatory regardless of turnover.

Q2: Can a freelancer opt for presumptive taxation under Section 58 (professional scheme)?

Yes, provided the freelancer's profession falls under the specified list (legal, medical, engineering, architecture, accountancy, technical consultancy, interior decoration, or other notified professions) and gross receipts do not exceed Rs. 75 lakhs (with cash receipts not exceeding 5% of total). Freelance software developers or IT consultants fall under "technical consultancy" and can opt for this scheme.

Q3: What happens if I do not deduct TDS on a payment to a contractor?

Under Section 36(ia) of the Income Tax Act, 2025, 30% of the expenditure will be disallowed in your income computation. Additionally, you may face interest under Section 398 (previously Section 201(1A)) at 1% per month (for non-deduction) or 1.5% per month (for non-deposit after deduction), plus a penalty under Section 447 (previously Section 271C) equal to the TDS amount.

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