Profits and Gains of Business or Profession (PGBP): Detailed Guide to Business & Professional Income Tax in India (Sections 28-44DA) 📊

For individuals, firms, or companies engaged in any trade, commerce, manufacture, or any other business or profession, the income earned is taxed under the head “Profits and Gains of Business or Profession” (PGBP). 💰🏢 This is often considered one of the most complex heads of income under the Income Tax Act, 1961, as it involves calculating net income by deducting eligible expenses from revenue. 🤯📉📈

The core framework for taxing business and professional income is laid down in Sections 28 to 44DA of the Act. 📚🔖 This detailed guide will break down these critical sections, explaining what constitutes PGBP, how it’s computed, which expenses are allowed or disallowed, and simplified taxation schemes available. 👇📖

Defining ‘Business’ and ‘Profession’ 🤔💼

Before diving into the sections, let’s understand the terms:

• Business: 🛒🏭 Includes any trade, commerce, or manufacture, or any adventure or concern in the nature of trade, commerce, or manufacture. It implies continuous and regular activity, although even a single venture can sometimes be considered ‘in the nature of trade’. ✨
• Profession: 🧑‍⚕️⚖️🎨 Includes vocation. It implies an occupation requiring specialized knowledge, skill, and intellectual ability (e.g., lawyer, doctor, architect, accountant, consultant, artist). 🧠🎓

Section 28: The Charge of PGBP 🎯Revenue Streams

Section 28 is the charging section for this head. ⚡ It specifies the types of income that are taxable as ‘Profits and Gains of Business or Profession’. The primary charge is on:

• The profits and gains of any business or profession which was carried on by the assessee at any time during the previous year. ✨

Beyond the core profit, Section 28 also includes certain specific receipts under this head, even if they are not strictly ‘profit’ in the conventional sense: 📋

• Export Incentives: 🌍✈️ Any profit on the sale of a license granted under the Imports and Exports (Control) Act, 1947, Duty Drawback, or any cash assistance against exports.
• Compensation: 🤝💵 Any compensation received for termination or modification of the terms of any business or professional contract (e.g., compensation received by a managing agent or selling agent).
• Income from Specific Activities: 👥Services Income derived by a trade, professional, or similar association from specific services performed for its members.
• Value of Benefits/Perquisites: 🎉🎁 The value of any benefit or perquisite, whether convertible into money or not, arising from business or the exercise of a profession.
• Interest, Salary, Bonus, Commission, Remuneration: 💸💼 Any interest, salary, bonus, commission or remuneration due to, or received by, a partner from a firm (subject to certain conditions regarding the firm’s taxability). ✨
• Capital Gains on Transfer of Certain Assets: 📈🔍 Specific capital gains like profit on sale of a capital asset used for scientific research (on which deduction was claimed), or recovery from a bad debt written off earlier.
• Keyman Insurance Policy: 🛡️👨‍💼 Any sum received under a Keyman Insurance Policy, including bonus.
• Sum Received for Not Carrying Out Business Activity: 🚫📜 Any sum received for not carrying out any activity in relation to any business or not sharing any know-how, patent, copyright, trademark, license, franchise, or any other business or commercial right of a similar nature. ✨

Explanation:

• Assessee: 🧑‍💼🏢 A person by whom any tax or any other sum of money is payable under the Act (can be an individual, firm, company, etc.).
• Previous Year (PY): 📅 The financial year (April 1st to March 31st) in which the income is earned.
• Profits and Gains: 💹 Net income The net income derived from carrying on the business or profession after deducting eligible expenses from revenue.

Section 29: The Method of Computation 🧮➕➖

Section 29 states that the income chargeable under the head “Profits and Gains of Business or Profession” shall be computed in accordance with the provisions contained in Sections 30 to 43D. ✨

This signifies a fundamental principle: unlike Salary (where standard/fixed deductions apply) or House Property (where deductions are % of AV or specific interest), PGBP income is computed based on actual revenue and expenses, subject to the specific rules of allowability and disallowability laid down in these sections. ✅❌

Essentially:

PGBP Income = Business / Professional Receipts − Allowable Business / Professional Expenses

This requires maintaining proper records of income and expenditure. 📁📒

Sections 30-36: Expenses Expressly Allowed as Deductions ✅ expenses

These sections list various specific expenses that are permitted deductions when calculating PGBP income: 👇

• Section 30: 🏠🏢 Rent, Rates, Taxes, Repairs, Insurance for Premises: Expenses related to buildings used for business or profession, such as rent, local rates (municipal taxes paid by tenant), current repairs, and annual insurance premium.
  
  
• Section 31: 🛠️⚙️ Repairs and Insurance of Machinery, Plant and Furniture: Expenses on current repairs and insurance premium for machinery, plant, or furniture used for business purposes.
  
  
• Section 32: 📉 Asset Value Depreciation: This is a major deduction. 👇
  
  
  • Depreciation: ⏳ Wear & Tear A decrease in the value of assets due to wear and tear, obsolescence, or usage. Tax law allows a deduction for this notional expense.
  • Allowable On: 🧱 machinery Tangible assets (buildings, machinery, plant, furniture) and Intangible assets (know-how, patents, copyrights, trademarks, licenses, franchises) owned and used for the purposes of business or profession.
  • Method: 📉📚 Written Down Value (WDV) method is generally followed, where depreciation is charged on the reducing balance of the asset’s value each year. Specific assets might use the Straight Line Method (SLM). 📏
  • Block of Assets: 📦 grouping Assets are grouped into ‘blocks’ based on asset type and depreciation rate. Depreciation is calculated on the WDV of the entire block, not individual assets.
  • Rates: 📜 Percentages Prescribed by the Income Tax Rules (e.g., Buildings: general 10%, Plant & Machinery: general 15%, Furniture: 10%, Intangibles: 25%).
  • Additional Depreciation: ✨ extra An extra 20% depreciation is allowed on new machinery or plant installed by manufacturing/power generation units (subject to conditions).
• Section 35: 🔬🧪 Expenditure on Scientific Research: 👇
  
  
  • Revenue expenditure on in-house scientific research is fully deductible. ✅
  • Capital expenditure on in-house scientific research is fully deductible in the year it is incurred (except land). ✅
  • Donations to approved scientific research associations or universities are deductible (weighted deduction previously available for some has been rationalized over the years, check current rates). 🤝
• Section 36: ✅➕ Other Specific Deductions: Important deductions under this section include: 👇
  
  
  • Insurance premium paid for insuring stock or health of employees. 🏥📦
  • Interest on Borrowed Capital: 🏦💵 Interest on loans used for the purpose of business or profession (subject to certain restrictions in Section 43B).
  • Bad Debts: 😟💔 If a business debt becomes irrecoverable, it can be written off as a deduction, provided it was previously recognised as income. ✅
  • Employee’s contribution to PF/Superannuation/NPS paid by the due date of the relevant fund. ⏳
  • Employer’s contribution to PF/Superannuation/NPS accounts (subject to limits). 💰 LIMIT

Section 37: General Deduction (The Residuary Section) 🌐 expenses

Section 37(1) is the general section allowing deductions for expenses not covered by Sections 30-36. 📦 It acts as a residuary provision. An expense is deductible under Section 37(1) if it satisfies all the following conditions:👇

• It is an expenditure (not a loss or a sum representing the value of something). 💵
  
  
• It is not in the nature of capital expenditure. 👇
  
  
  • Capital Expenditure: 🏗️🏢 Expenditure incurred to acquire or improve a long-term asset, providing a benefit lasting for many years (e.g., purchasing land, building a factory). Generally not fully deductible in one year, but eligible for depreciation.
• It is not in the nature of personal expenses of the assessee.
  
  
• It has been laid out or expended wholly and exclusively for the purposes of the business or profession. 👇
  
  
  • Wholly and Exclusively: 💯 Sole Purpose The expenditure must be incurred solely for promoting the business/profession. It doesn’t have to be necessarily incurred or essential, just for the purpose of the business.
• It has been incurred in the previous year. 📅
  
  
• It is not for any purpose which is an offence or is prohibited by law (e.g., bribes, illegal payments are not deductible). 🚫⚖️
  
  
• It is not covered under Sections 30 to 36. ✨
  
  

Examples of expenses deductible under Section 37(1): 💡 Rent for office, salaries to employees, electricity bills, telephone expenses, stationery, advertising costs, business travel expenses, legal expenses related to business disputes, audit fees, etc., provided they meet the conditions. 🏢📞💡✈️⚖️

Section 37(1) also specifically disallows certain expenses, such as expenditure on Corporate Social Responsibility (CSR) unless it qualifies as a deduction under other sections (like Section 30-36). 🚫🌱 Fines and penalties for violation of law are also not deductible under Section 37. 🚫 fine

Sections 40, 40A, 43B: Expenses Expressly Disallowed ❌ expenses

These sections list expenses that are not allowed as deductions, even if they might appear to be business-related, either due to their nature or non-compliance with specific rules (like TDS). 🚫👇

• Section 40: ❌ Payments Disallows certain payments like income-tax, tax on salary paid by employer (as perquisite is allowed deduction), payments to non-residents without deduction/payment of TDS. 💸
  
  
• Section 40A: 🚫📏 Contains significant restrictions: 👇
  
  
  • Section 40A(2): ❌👨‍👩‍👧‍👦 Disallows excessive or unreasonable payments made to relatives or associated persons of the assessee.
  • Section 40A(3): ❌ cash >10k Disallows cash payments exceeding the limit of ₹ 10,000 for a single expense to a single person in a day. Payments exceeding this limit must generally be made through banking channels (Account Payee Cheque/Draft, ECS, etc.) to be deductible. 🏦 For payments to transporters, this limit is ₹ 35,000. 🚚
  • Section 40A(3A): ⏪🔄 If an expense was allowed in an earlier year but the payment exceeding the limit is made in cash in the current year, the payment amount is deemed as income in the current year. 🔄 income
  • Section 40A(iib): 🚫🔗 Restricts deduction for payments made to related persons in specified domestic transactions if they exceed fair market value.
  • Section 40A(ia): 🚫 TDS Disallows a percentage (currently 30%) as the disallowed limit of certain expenses (like interest, commission, brokerage, rent, royalty, professional fees, technical services fees) if Tax Deducted at Source (TDS) is applicable but has not been deducted or paid on time. 📉 Similarly, a percentage (currently 30%) as the disallowed limit of expenses related to which Tax Collected at Source (TCS) is applicable but not collected/paid is disallowed. 🚫 TCS
• Section 43B: ⏳ Payment Basis Payments Allowed Only on Actual Payment Basis: This section overrides the regular mercantile system of accounting for certain expenses. 💰 Even if the liability for these expenses is incurred and accounted for in the books in a particular year, the deduction is allowed only in the year the actual payment is made. If paid by the due date of filing the income tax return, it can be claimed in the year the liability was incurred. 📅 Expenses covered include: 👇
  
  
  • Any sum payable by way of tax, duty, cess or fee. 🧾
  • Employer’s contribution to any provident fund, superannuation fund, gratuity fund, etc. 🏦
  • Bonus or commission payable to employees. 🎉🎁
  • Interest on any loan or borrowing from public financial institutions, state financial corporations, state industrial investment corporations, scheduled banks, cooperative banks, or Non-Banking Financial Companies (NBFCs). 🏦💵
  • Any sum payable for leave encashment. 🌴💰
  • Any sum payable to Indian Railways for the use of railway assets. 🚂

Explanation:

• TDS (Tax Deducted at Source): ✂️💼 Income tax required to be deducted by the payer at the time of making certain payments (like salary, rent, professional fees) and deposited with the government.
• TCS (Tax Collected at Source): 🛒💰 Income tax required to be collected by the seller at the time of receiving payment for certain goods (specified by law) and deposited with the government.
• Mercantile Accounting System (Accrual Basis): 📝🗓️ Recognizes income when earned and expenses when incurred, regardless of when cash is received or paid.
• Cash Accounting System: 💵📥 Recognizes income only when cash is received and expenses only when cash is paid.

Section 43: Definitions Relevant to Business Income 📜 glossary

Section 43 provides definitions for certain terms specifically used in the computation of PGBP, such as: 👇

• Actual Cost: 💲 Asset Base The actual cost of an asset to the assessee, used as the base for calculating depreciation.
• Written Down Value (WDV): 📉 Book Value The book value of an asset (Actual Cost minus depreciation already allowed), used as the base for depreciation calculation in subsequent years under the WDV method.

Sections 44AA & 44AB: Books of Accounts and Tax Audit 📖🔍

While the computation rules are in Sections 28-43D, Sections 44AA and 44AB deal with compliance: ✅

• Section 44AA: 📖📁 Requires specified persons carrying on business or profession to maintain prescribed books of accounts if their income or gross receipts exceed certain limits. 📊 LIMITS (These limits under Section 44AA are, for specified professions, if gross receipts exceed ₹ 1.5 Lakhs in all three immediately preceding previous years or are likely to exceed this amount in the current year; and for business, if income exceeds ₹ 1,20,000 or total sales/turnover/gross receipts exceed ₹ 10,00,000 in all three immediately preceding previous years, or are likely to exceed these amounts in the current year).
• Section 44AB: 🕵️‍♂️🧾 Requires specified persons carrying on business or profession to get their accounts audited by a Chartered Accountant (Tax Audit) if their turnover (for business) or gross receipts (for profession) exceed prescribed thresholds (e.g., the limit of ₹1 Crore for business, the limit of ₹50 Lakhs for profession, with higher limits for businesses with significant digital receipts). 📈💻 LIMITS THRESHOLDS

Sections 44AD, 44ADA, 44AE, etc.: Presumptive Taxation Schemes ✨ simplified

These sections offer simplified methods of calculating PGBP income for eligible small taxpayers. 👍

• Concept: ✨ Instead of maintaining detailed books of accounts and computing income based on actual revenue minus expenses (the ‘normal’ method), income is ‘presumed’ to be a certain percentage of the turnover or gross receipts. 📊
  
  
• Benefit: ✅ Less Paperwork Reduced compliance burden (no detailed books, no tax audit required if income is declared as per the presumptive rate).
  
  

Key Presumptive Schemes: 👇

• Section 44AD: 🏢 For eligible businesses (resident individuals, HUFs, Firms, excluding LLPs) with turnover up to the limit of ₹ 3 Crore (if cash receipts do not exceed the limit of 5% of total receipts, otherwise limit is ₹ 2 Crore). 📈 LIMIT Income is presumed at 8% of total turnover or gross receipts, or 6% for the amount received via digital modes. 💻📊
• Section 44ADA: 🧑‍🎓 For eligible professionals (resident individuals, Firms, excluding LLPs) with gross receipts up to the limit of ₹ 50 Lakhs. 📊 LIMIT Income is presumed at 50% of total gross receipts. 💡
• Section 44AE: 🚛 For businesses engaged in plying, hiring, or leasing goods carriages and owning not more than the limit of 10 goods vehicles. LIMIT Income is presumed at a fixed amount per vehicle based on tonnage. 🔢🚚

Note: Opting for a presumptive scheme has conditions, including a lock-in period if you opt out after initial adoption (for Section 44AD). 🔒 Other presumptive sections exist for specific activities like shipping (44B), aircraft (44BBA), construction (44BBB), exploration (44BB), and specific foreign companies (44DA). 🚢✈️🏗️⛏️🌍

Calculation of PGBP: Normal vs. Presumptive 🧮 compare

• Normal Computation: 📏 👇
  
  
  • Start with Revenue (Sales, Service Fees, etc.) and other incomes taxable under Section 28. ➕💰
  • Subtract expenses allowed under Sections 30 to 37. ➖✅
  • Add back expenses expressly disallowed under Sections 40, 40A, 43B, etc. ➕❌
  • The result is the taxable PGBP income. ✅💼
• Presumptive Computation: ✨ 👇
  
  
  • Identify total turnover or gross receipts. 📊
  • Apply the prescribed percentage (e.g., 6%/8% for 44AD, 50% for 44ADA). ✖️%
  • The result is the taxable PGBP income. No further expenses or depreciation are deductible. ✅💡

Examples 📊 showcase

Example 1: Normal Business Computation (Section 28-43D) 👩‍💼 calculaton

Ms. Priya runs a trading business. For PY 2024-25:

• Sales Turnover: ₹ 1.5 Crore 📈
  
  
• Other income taxable under Sec 28 (e.g., export incentive): ₹ 50,000
  
  
• Expenses incurred: 👇
  
  
  • Rent of shop: ₹ 2,00,000 (Paid via cheque)
  • Salaries to staff: ₹ 5,00,000 (TDS deducted and paid)
  • Electricity & Phone: ₹ 80,000 (Paid digitally)
  • Advertising: ₹ 1,50,000 (Paid digitally)
  • Depreciation on shop furniture (WDV ₹ 1,00,000 @ 10%): ₹ 10,000 
  • Cash payment to supplier for goods: ₹ 12,000 (Disallowed under Sec 40A(3)) ❌ cash >10k
  • Professional Fees to consultant: ₹ 30,000 (TDS applicable @ 10% but not deducted) ❌ TDS
  • Interest paid on Bank Loan used for business: ₹ 60,000 (Paid on time)

Calculation:

• Gross Receipts / Income (Sec 28): 💰➕🌍
  
  
  • Sales Turnover: ₹ 1,50,00,000
  • Export Incentive: ₹ 50,000
  • Total Revenue/Income = ₹ 1,50,50,000 ✅
• Allowable Expenses: ➖✅
  
  
  • Rent (Sec 30/37): ₹ 2,00,000
  • Salaries (Sec 37): ₹ 5,00,000
  • Electricity & Phone (Sec 37): ₹ 80,000
  • Advertising (Sec 37): ₹ 1,50,000
  • Depreciation (Sec 32): ₹ 10,000
  • Interest on Bank Loan (Sec 36(1)(iii)): ₹ 60,000
  • Subtotal Allowable = ₹ 2,00,000 + ₹ 5,00,000 + ₹ 80,000 + ₹ 1,50,000 + ₹ 10,000 + ₹ 60,000 = ₹ 10,00,000 ✅
• Disallowances: ➕❌
  
  
  • Cash payment > ₹ 10k [Sec 40A(3)]: ₹ 12,000 (Fully disallowed) ❌
  • Professional Fees (TDS not done) [Sec 40A(ia)]: 30% of ₹ 30,000 = ₹ 9,000 (Disallowed portion) ❌
  • Total Disallowances = ₹ 12,000 + ₹ 9,000 = ₹ 21,000 ❌
• PGBP Income: 🧮 Final Result
  
  
  • Total Revenue/Income – Subtotal Allowable + Total Disallowances
  • ₹ 1,50,50,000 – ₹ 10,00,000 + ₹ 21,000 = ₹ 1,40,71,000 ✅

Ms. Priya’s PGBP Income is ₹ 1,40,71,000. (Note: If she opts for presumptive Sec 44AD, the calculation would be much simpler if eligible). ✨

Example 2: Presumptive Taxation (Section 44AD) 👨‍💼 simplified

Mr. Amit is a resident individual running a small trading business. For PY 2024-25, his total turnover is ₹ 1.2 Crore. All receipts are via digital modes. He opts for Section 44AD. ✨

• Turnover: ₹ 1,20,00,000 📊
• Income Presumed @ 6% (digital receipts): ₹ 1,20,00,000 * 6% = ₹ 7,20,000 ✅

Mr. Amit’s PGBP Income under Section 44AD is ₹ 7,20,000. He does not need to maintain detailed books or get a tax audit (as income is declared as per presumptive rate and turnover is within limits). 🎉📖 LIMITS

Example 3: Presumptive Taxation (Section 44ADA) 👩‍🎓 simplified

Ms. Komal is a resident architect. For PY 2024-25, her gross receipts are ₹ 40 Lakhs. She opts for Section 44ADA. ✨

• Gross Receipts: ₹ 40,00,000 📊
• Income Presumed @ 50%: ₹ 40,00,000 * 50% = ₹ 20,00,000 ✅

Ms. Komal’s PGBP Income under Section 44ADA is ₹ 20,00,000. She does not need to maintain detailed books or get a tax audit. 🎉📖

Maintaining Accounts (Section 44AA) and Tax Audit (Section 44AB) 📚🔍

For those not opting for (or not eligible for) presumptive schemes, maintaining proper Books of Accounts (like ledgers, journals, cash book) as specified under Section 44AA is mandatory if income or gross receipts exceed certain limits. 📖📂 LIMITS

Furthermore, a Tax Audit (audit of accounts by a Chartered Accountant and submission of a report in prescribed form) is required under Section 44AB if turnover (for business) or gross receipts (for profession) exceed prescribed thresholds (e.g., the limit of ₹1 Crore for business, the limit of ₹50 Lakhs for profession, with higher limits for businesses with significant digital receipts). 🕵️‍♂️🧾 LIMITS THRESHOLDS If you opt for presumptive taxation but declare income lower than the presumed rate, you might also be required to maintain books and get an audit. 📉📚🔍

Conclusion ✨ summation

The head “Profits and Gains of Business or Profession” (Sections 28-44DA) is governed by intricate rules regarding income inclusion (Section 28), computation methodology (Section 29), explicitly allowed expenses (Sections 30-36), general expense deductibility (Section 37), and crucial disallowances (Sections 40, 40A, 43B). 📊⚙️✅❌ For eligible small taxpayers, presumptive taxation schemes (Sections 44AD, 44ADA, etc.) offer a simplified alternative to the detailed computation. ✨👍

Accurately computing PGBP requires careful adherence to these rules, proper record-keeping (Section 44AA), and potentially a tax audit (Section 44AB).

📖🔍 Given the complexity and numerous specific provisions, seeking guidance from a qualified tax professional is highly recommended for anyone earning business or professional income. 🙏💼🎓