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Understanding Taxable Income from Business or Profession

Understanding Taxable Income from Business or Profession

Mar 21, 2024

15 Mins

Title: Understanding Taxable Income from Business or Profession

By Anjana Dhand

Updated on October 24, 2023

Reviewed by Rinju Abraham

Fact-checked by Rinju Abraham

In the Income Tax Act, income from business includes trade, commerce, manufacture, or any similar venture. On the other hand, the term "profession" refers to occupations that require skill and learning, such as lawyers, architects, or auditors. Although the tax treatment is the same for both business and profession, let's focus on the tax implications of income from business or profession.

Taxable Income from Business or Profession:

The following types of income are subject to tax:

1. Profit and gains from any business or profession conducted during the previous year.

2. Compensation or payments received by specified individuals.

3. Income derived from trade associations performing specific services for their members.

4. Profit from the sale of licenses granted under the Imports (Control) Order 1955.

5. Cash assistance received against exports under any government scheme.

6. Duty of Customs or Excise repaid as a drawback to any person against exports under the Customs and Central Excise Duties Drawback Rules, 1971.

7. Profit from the transfer of Duty Entitlement Pass Book Scheme and Duty-Free Replenishment Certificate.

8. Value of benefits or perquisites arising from a business or profession.

9. Interest, salary, bonus, commission, or remuneration due to partners from a partnership firm.

10. Non-compete fees received for not carrying out any activity related to business or profession.

11. Fees received for not sharing any know-how, patent, copyright, trademark, license, franchise or other business information or techniques.

12. Sum received under a Keyman Insurance policy, including bonus amounts.

13. Profit or gains resulting from the conversion of inventory into capital assets.

14. Sum received in cash or kind for the demolition, destruction, discard, or transfer of capital assets, assuming the entire expenditure for such assets has been deducted under Section 35AD.

Expenses Allowed under Business and Profession:

The following expenses can be deducted from income:

1. Rent, rates, taxes, repairs, and insurance of buildings (Section 30).

2. Insurance and repair of plant, machinery, and furniture (Section 31).

3. Depreciation on tangible and intangible assets (Section 32).

4. Additional depreciation on plant and machinery (Section 32).

5. Deduction for depositing amounts in Tea/Coffee/Rubber development account (Section 33AB).

6. Deduction for depositing amounts in a special account with SBI or Site Restoration account (Section 33ABA).

Expenses Allowed under Sections 36 to 37:

The following expenses are allowed for tax deduction:

1. Insurance premium paid for stock or stores damaged or destroyed (Section 36(1)(i)).

2. Premium paid by a Federal Milk Cooperative Society for cattle insurance (Section 36(1)(ia)).

3. Amount paid by the employer for health insurance (Section 36(1)(ib)).

4. Bonus or commission paid to employees (Section 36(1)(ii)).

5. Deduction for capital borrowed (Section 36(1)(iii)).

6. Discount on Zero-Coupon Bonds (Section 36(1)(iiia)).

7. Contributions to recognized provident fund, superannuation fund, or gratuity fund (Section 36(1)(iv) & (v)).

8. Contribution to a pension scheme (Section 36(1)(iva)).

9. Deposits made towards employees' provident fund, superannuation fund, or Employee State Insurance Act 1948 (Section 36(1)(va)).

10. Allowance for deceased or permanently useless animals (Section 36(1)(vi)).

11. Deduction for bad debts (Section 36(1)(vii) and (viia)).

12. Special deduction for specified entities engaged in eligible businesses (Section 36(1)(viii)).

13. Expenditure for promoting family planning among employees (Section 36(1)(ix)).

14. Expenditure incurred by a corporation or body corporate for a specified purpose (Section 36(1)(xii)).

15. Contribution to credit guarantee trust fund for Micro & Small Industries (Section 36(1)(xiv)).

16. Deduction for Securities transaction tax paid (Section 36(1)(xv)).

17. Deduction for commodities transaction tax paid (Section 36(1)(xvi)).

18. Expenditure by a cooperative society for purchasing sugarcane (Section 36(1)(xvii)).

19. Marked to market losses or other unexpected losses as per Income Computation and Disclosure Standards (Section 36(1)(xviii)).

Note: The information provided serves as a general understanding of taxable income from business or profession and the allowable deductions for tax purposes. It is advisable to consult with a tax professional for specific advice based on individual circumstances.

Title: Understanding Taxable Income from Business or Profession

By Anjana Dhand

Updated on October 24, 2023

Reviewed by Rinju Abraham

Fact-checked by Rinju Abraham

In the Income Tax Act, income from business includes trade, commerce, manufacture, or any similar venture. On the other hand, the term "profession" refers to occupations that require skill and learning, such as lawyers, architects, or auditors. Although the tax treatment is the same for both business and profession, let's focus on the tax implications of income from business or profession.

Taxable Income from Business or Profession:

The following types of income are subject to tax:

1. Profit and gains from any business or profession conducted during the previous year.

2. Compensation or payments received by specified individuals.

3. Income derived from trade associations performing specific services for their members.

4. Profit from the sale of licenses granted under the Imports (Control) Order 1955.

5. Cash assistance received against exports under any government scheme.

6. Duty of Customs or Excise repaid as a drawback to any person against exports under the Customs and Central Excise Duties Drawback Rules, 1971.

7. Profit from the transfer of Duty Entitlement Pass Book Scheme and Duty-Free Replenishment Certificate.

8. Value of benefits or perquisites arising from a business or profession.

9. Interest, salary, bonus, commission, or remuneration due to partners from a partnership firm.

10. Non-compete fees received for not carrying out any activity related to business or profession.

11. Fees received for not sharing any know-how, patent, copyright, trademark, license, franchise or other business information or techniques.

12. Sum received under a Keyman Insurance policy, including bonus amounts.

13. Profit or gains resulting from the conversion of inventory into capital assets.

14. Sum received in cash or kind for the demolition, destruction, discard, or transfer of capital assets, assuming the entire expenditure for such assets has been deducted under Section 35AD.

Expenses Allowed under Business and Profession:

The following expenses can be deducted from income:

1. Rent, rates, taxes, repairs, and insurance of buildings (Section 30).

2. Insurance and repair of plant, machinery, and furniture (Section 31).

3. Depreciation on tangible and intangible assets (Section 32).

4. Additional depreciation on plant and machinery (Section 32).

5. Deduction for depositing amounts in Tea/Coffee/Rubber development account (Section 33AB).

6. Deduction for depositing amounts in a special account with SBI or Site Restoration account (Section 33ABA).

Expenses Allowed under Sections 36 to 37:

The following expenses are allowed for tax deduction:

1. Insurance premium paid for stock or stores damaged or destroyed (Section 36(1)(i)).

2. Premium paid by a Federal Milk Cooperative Society for cattle insurance (Section 36(1)(ia)).

3. Amount paid by the employer for health insurance (Section 36(1)(ib)).

4. Bonus or commission paid to employees (Section 36(1)(ii)).

5. Deduction for capital borrowed (Section 36(1)(iii)).

6. Discount on Zero-Coupon Bonds (Section 36(1)(iiia)).

7. Contributions to recognized provident fund, superannuation fund, or gratuity fund (Section 36(1)(iv) & (v)).

8. Contribution to a pension scheme (Section 36(1)(iva)).

9. Deposits made towards employees' provident fund, superannuation fund, or Employee State Insurance Act 1948 (Section 36(1)(va)).

10. Allowance for deceased or permanently useless animals (Section 36(1)(vi)).

11. Deduction for bad debts (Section 36(1)(vii) and (viia)).

12. Special deduction for specified entities engaged in eligible businesses (Section 36(1)(viii)).

13. Expenditure for promoting family planning among employees (Section 36(1)(ix)).

14. Expenditure incurred by a corporation or body corporate for a specified purpose (Section 36(1)(xii)).

15. Contribution to credit guarantee trust fund for Micro & Small Industries (Section 36(1)(xiv)).

16. Deduction for Securities transaction tax paid (Section 36(1)(xv)).

17. Deduction for commodities transaction tax paid (Section 36(1)(xvi)).

18. Expenditure by a cooperative society for purchasing sugarcane (Section 36(1)(xvii)).

19. Marked to market losses or other unexpected losses as per Income Computation and Disclosure Standards (Section 36(1)(xviii)).

Note: The information provided serves as a general understanding of taxable income from business or profession and the allowable deductions for tax purposes. It is advisable to consult with a tax professional for specific advice based on individual circumstances.

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