Business income and presumptive taxation

In short

"Profits and gains of business or profession" (PGBP) is the third head of income under sections 28 to 44DB of the Income-tax Act, 1961, and it is computed not from the profit-and-loss account as it stands but from that profit as adjusted by the Act's own rules of allowance and disallowance. Presumptive taxation (sections 44AD, 44ADA, 44AE and the non-resident schemes) lets small businesses, professionals and transporters declare a fixed percentage of turnover as income and escape books of account and audit. The topic carries the heaviest marks in B.Com taxation papers, is the core of CA/CS/CMA Inter direct-tax questions, and is tested in placement rounds for Big Four and mid-tier tax teams, NBFC and bank credit desks, and accounting roles that touch Tax Audit, ITR-3/ITR-4 and the 3CA/3CB-3CD report. Section references here are to the 1961 Act as amended up to the Finance Act, 2025 (assessment year 2026-27); the Income-tax Act, 2025 renumbers these provisions with effect from 1 April 2026, so the section numbers, not the logic, will change in later syllabi.

Explained

Charge of business income and the computation framework

• Section 28 (charging section) taxes: profits of any business or profession carried on by the assessee during the previous year; compensation on termination or modification of a management/agency contract; income of a trade, professional or similar association from specific services to members; export incentives and duty drawback; the value of any benefit or perquisite arising from business, whether convertible into money or not (28(iv)); non-compete fees and sums for not sharing know-how or a right to manufacture (28(va)); sums received under a keyman insurance policy; and the fair market value of inventory converted into a capital asset (28(via)).
• "Business" (s.2(13)) includes trade, commerce, manufacture or any adventure in the nature of trade; "profession" (s.2(36)) includes vocation. Legality is irrelevant — illegal business profits are taxable, though the expenses of an offence are not deductible.
• Section 29: income under s.28 is computed as per sections 30 to 43D. Section 145: income is computed on the cash or mercantile system regularly employed; a hybrid system is not permitted. Ten ICDS (Income Computation and Disclosure Standards) apply to assessees following the mercantile system, except individuals/HUFs not required to get accounts audited.
• Working rule used in exams: start with net profit as per the P&L account, add back expenses debited but not allowable, deduct allowable expenses not debited, deduct income credited but taxable under another head or exempt, and add business receipts not credited.
• Rent from a let-out building is "Income from house property", interest on surplus funds and gifts are usually "Other sources", and profit on sale of a fixed asset is dealt with by the block-of-assets/capital-gains rules — all must be removed from the P&L profit.

Admissible deductions (sections 30 to 37)

• S.30: rent, rates, taxes, land revenue, repairs (capital repairs excluded, whether the assessee is owner or tenant) and insurance of buildings used for business. S.31: current repairs and insurance of plant, machinery and furniture. Capital repairs are not deductible but are capitalised and depreciated.
• S.35: revenue and capital (other than land) expenditure on in-house scientific research related to the business, deductible in full; contributions to approved research associations, universities and national laboratories are deductible as notified (the former weighted 150%/200% deductions have been withdrawn and are now 100%).
• S.35D: preliminary expenses amortised over 5 years; S.35DD: amalgamation/demerger expenses over 5 years; S.35DDA: VRS payments over 5 years; S.35CCC/35CCD: agricultural extension and skill-development project expenditure (rates reduced to 100%).
• S.36 — specific deductions: insurance of stocks and of employees' health; bonus or commission to employees (if not payable as profit-sharing in lieu of dividend); interest on capital borrowed for business (interest on the proprietor's own capital is never deductible); employer's contribution to recognised PF, approved superannuation, gratuity fund and NPS; bad debts actually written off (36(1)(vii)); family planning expenditure (companies); securities transaction tax and commodities transaction tax; and expenditure on notified agricultural/dairy projects.
• S.37(1) — the residuary clause. Expenditure is deductible if it is (a) not covered by ss.30-36, (b) not capital expenditure, (c) not personal expenditure, (d) laid out wholly and exclusively for the business, and (e) incurred in the previous year. It covers advertisement, telephone, travel, legal and professional fees, staff welfare, discounts and so on.
• Expressly not deductible under s.37: advertisement in a political party's publication (37(2B)); expenditure that is an offence or prohibited by law, including bribes and freebies to medical practitioners (Explanation 1 and 3, read with the MCI/NMC code); and CSR expenditure under s.135 of the Companies Act, 2013 (Explanation 2) — though a CSR spend that independently qualifies under s.35 or s.80G may still be claimed there.

Disallowances, deemed income and losses

• S.40(a)(i)/(ia) — TDS defaults: payments to a non-resident without TDS are fully disallowed; payments to a resident without TDS are disallowed to the extent of 30%. The amount is allowed in the year the tax is finally paid. S.40(a)(ii): income tax, surcharge and cess are not deductible (GST and local taxes are).
• S.40(b): in a firm, remuneration to a working partner and interest to partners are deductible only if authorised by the deed, and interest is capped at 12% p.a. simple; remuneration is capped by a slab of book profit — as revised by the Finance Act, 2025, on the first ₹6,00,000 of book profit (or in case of a loss) ₹3,00,000 or 90% of book profit, whichever is higher, plus 60% of the balance.
• S.40A(2): excessive or unreasonable payments to specified related persons are disallowed to the extent of the excess over fair value.
• S.40A(3): any payment above ₹10,000 to a single person in a single day otherwise than by account-payee cheque/draft/ECS/prescribed electronic mode is 100% disallowed (limit ₹35,000 for payments to transporters for plying/hiring of goods carriages); Rule 6DD lists exceptions. A capital asset so paid for gets no depreciation (s.43(1) proviso).
• S.40A(7): provision for gratuity is disallowed unless actually paid or contributed to an approved fund. S.40A(9): contributions to unapproved funds disallowed.
• S.43B — allowed only on actual payment: tax, duty, cess, fee, employer PF/ESI/gratuity contributions, bonus and commission, interest on loans from banks/PFIs/NBFCs, railway asset-use charges and leave encashment are deductible in the year of payment, except that they are allowed on an accrual basis if paid on or before the due date of filing the return u/s 139(1). Clause (h) (from AY 2024-25) denies that relaxation to amounts payable to micro and small enterprises: deduction comes only in the year of actual payment unless paid within the MSMED Act, 2006 time limit (15 days, or up to 45 days with a written agreement). Interest on a loan converted into a fresh loan is not "paid".
• S.41(1): remission or cessation of a trading liability or a refund of tax earlier allowed is deemed business income, even if the business no longer exists. S.41(2): balancing charge on sale of assets depreciated on a straight-line basis (power undertakings). S.176(3A): sums received after discontinuance are taxable.
• Losses: business loss carried forward under s.72 for 8 assessment years, set off only against business income; speculation loss (s.73) for 4 years against speculation profits only; s.73A specified-business (35AD) loss indefinitely; unabsorbed depreciation (s.32(2)) is carried forward indefinitely and can be set off against any head other than salary. Carry forward of business loss requires the return to be filed within the s.139(1) due date; unabsorbed depreciation does not.

Depreciation and the block of assets

• S.32 allows depreciation on tangible assets (buildings, machinery, plant, furniture) and intangibles (know-how, patents, copyrights, trademarks, licences, franchises) that are owned (wholly or partly) and used for the business. Depreciation is mandatory — it cannot be waived.
• Computed on the written-down value of the block of assets — a group of assets of the same class carrying the same rate — not asset by asset. Individual asset profits do not arise; the block's WDV simply rises on purchase and falls by the moneys payable on sale.
• Half depreciation if an asset is acquired and put to use for less than 180 days in the year of acquisition (the restriction does not apply in later years).
• Common rates (Rule 5, Appendix I, WDV method): residential buildings 5%, other buildings 10%, temporary structures 40%, furniture and fittings 10%, plant and machinery (general) and motor cars 15%, computers and computer software 40%, pollution-control and energy-saving devices 40%, books (professionals) 40%, intangibles 25%. The maximum rate is capped at 40% from AY 2018-19. Undertakings engaged in generation/distribution of power may opt for the SLM method.
• Additional depreciation (s.32(1)(iia)): 20% of the actual cost of new plant and machinery (not office appliances, vehicles, second-hand or ship/aircraft) acquired by a manufacturing or power-generating assessee; only 10% if used for less than 180 days, with the balance 10% allowed in the next year. Not available to an assessee opting for s.115BAA/115BAB/115BAC.
• Goodwill of a business or profession is not a depreciable asset from AY 2021-22 (Finance Act, 2021); the amount paid for it becomes cost of acquisition for capital gains.
• If the whole block is sold, no depreciation is allowed; the difference becomes a short-term capital gain or loss u/s 50, whatever the holding period.

Books of account, tax audit and compliance

• S.44AA: the specified professions (legal, medical, engineering, architectural, accountancy, technical consultancy, interior decoration, authorised representative, film artist, company secretary, and notified information technology) must maintain the books prescribed by Rule 6F if gross receipts exceed ₹1,50,000 in all three preceding years. Other businesses/professions must maintain books if income exceeds ₹1,20,000 or turnover/gross receipts exceed ₹10,00,000 (for individuals and HUFs, ₹2,50,000 and ₹25,00,000). Books must be kept for 6 years.
• S.44AB — compulsory audit where: business turnover exceeds ₹1 crore, raised to ₹10 crore if aggregate cash receipts and cash payments do not exceed 5% of the respective totals; professional gross receipts exceed ₹50 lakh; a 44AD assessee declares lower income and is hit by 44AD(4) with total income above the basic exemption; or a 44ADA/44AE assessee declares income below the presumptive rate. Report in Form 3CA/3CB with 3CD, due 30 September, return due 31 October.
• ITR forms: ITR-4 (Sugam) for resident individuals/HUFs/firms with presumptive income and total income up to ₹50 lakh; ITR-3 for other business income of individuals/HUFs; ITR-5 for firms/LLPs; ITR-6 for companies.
• Business income bears the slab rates (default s.115BAC regime for individuals/HUFs/AOPs, with the option to leave it; a business assessee who opts out of 115BAC must file Form 10-IEA and can return to it only once). Domestic companies may opt for s.115BAA (22%) or new manufacturing s.115BAB (15%), both without additional depreciation and most incentive deductions.

Presumptive taxation schemes

• Purpose: reduce the compliance burden on small assessees — no detailed books, no audit, a deemed margin, and a single advance-tax instalment.
• S.44AD — small business. Eligible assessee: a resident individual, HUF or partnership firm (not an LLP) that has not claimed deductions under ss.10AA, 80-IA to 80-RRB in that year. Eligible business: any business except plying/hiring/leasing goods carriages (covered by 44AE), agency business, and income from commission or brokerage; professions under 44AA(1) are outside it. Turnover limit ₹2 crore, raised to ₹3 crore from AY 2024-25 if cash receipts do not exceed 5% of total turnover (receipts by cheque/draft that are not account-payee count as cash).
• Deemed income: 8% of gross turnover or receipts, reduced to 6% for the part received by account-payee cheque/draft/ECS/prescribed electronic mode on or before the due date u/s 139(1). A higher figure may be declared voluntarily.
• Effects: deductions under ss.30 to 38 are deemed already allowed (depreciation is notionally allowed and the WDV is reduced accordingly); disallowances under ss.40, 40A, 43B do not apply; a firm cannot further deduct partners' interest and remuneration (from AY 2017-18); Chapter VI-A deductions remain available; advance tax is payable in one instalment by 15 March (s.211(1)(b)).
• S.44AD(4) — the lock-in. If an assessee who declared under 44AD declares lower income in any of the next five assessment years, 44AD is barred for the five assessment years following that year of default, and books (44AA) plus audit (44AB) become compulsory if total income exceeds the basic exemption limit.
• S.44ADA — professionals. Resident individual or partnership firm (not LLP) — an HUF is not eligible — in a profession referred to in 44AA(1) with gross receipts up to ₹50 lakh, raised to ₹75 lakh from AY 2024-25 if cash receipts are within 5%. Deemed income 50% of gross receipts. No 44AD(4)-style lock-in, but declaring less requires books and audit.
• S.44AE — goods carriages. Any assessee owning not more than 10 goods carriages at any time in the year (ownership, not operation, is the test; hire-purchase/instalment vehicles count). Deemed income per vehicle per month or part month: ₹1,000 per tonne of gross vehicle weight for a heavy goods vehicle (GVW above 12,000 kg) and ₹7,500 for any other goods carriage. Partners' interest and remuneration are separately deductible under 44AE (unlike 44AD). A higher declared amount prevails.
• Non-resident and special schemes: s.44B shipping — 7.5% of freight; s.44BB oil-exploration services — 10%; s.44BBA aircraft operation — 5%; s.44BBB foreign company in a turnkey power project — 10%; s.44DA/115A for royalties and fees for technical services; s.44BBC for cruise-ship operators (20%) and s.44BBD for non-residents providing services/technology to resident electronics-manufacturing units (25%) are recent insertions whose first applicable year should be confirmed against the current Finance Act.
• Limitations of presumptive taxation: a loss or a genuinely thin margin cannot be reflected (the assessee must step out, keep books and get audited); no set-off of the deemed income against the real depreciation; the deemed rate can exceed the actual margin in low-margin trading; and GST law, MSME law and the Companies Act continue to require proper records regardless.

Key points

• S.28 - charging section for business/profession income, including benefits, non-compete fees and keyman insurance proceeds.
• S.37(1) - residuary deduction for revenue expenditure laid out wholly and exclusively for business; excludes capital, personal, CSR and illegal payments.
• S.40(a)(ia) - 30% disallowance of a resident payment made without TDS; 100% for a non-resident payment.
• S.40A(3) - cash payment above ₹10,000 per person per day is fully disallowed (₹35,000 for goods transporters).
• S.43B - statutory dues, interest to banks and employer fund contributions allowed only on payment, or by the s.139(1) due date.
• S.43B(h) - dues to micro and small enterprises deductible only on actual payment unless paid within 15/45 days under the MSMED Act.
• Block of assets - depreciation is on a class-wise WDV, never asset-wise; sale reduces the block by moneys payable.
• 180-day rule - half depreciation in the year of acquisition if the asset is both acquired and used for less than 180 days.
• Additional depreciation - 20% on new manufacturing plant and machinery u/s 32(1)(iia); forfeited under 115BAA/115BAB/115BAC.
• Goodwill - no depreciation from AY 2021-22; it becomes cost of acquisition for capital gains.
• S.32(2) - unabsorbed depreciation carried forward indefinitely; business loss u/s 72 only 8 years.
• S.44AB - audit at turnover above ₹1 crore, or ₹10 crore if cash receipts and payments are each within 5%; professions at ₹50 lakh.
• S.44AD - 8% of turnover, 6% on digital receipts; limit ₹2 crore, or ₹3 crore with cash receipts within 5%.
• 44AD(4) lock-in - opting out in any of five following years bars the scheme for the next five years and forces audit.
• S.44ADA - 50% of gross receipts for 44AA(1) professionals; limit ₹50 lakh, or ₹75 lakh with cash within 5%.
• S.44AE - ₹1,000 per tonne of GVW per month for heavy goods vehicles, ₹7,500 per month otherwise, up to 10 vehicles.
• Partner payments - not deductible under 44AD, but deductible under 44AE.
• Advance tax - 44AD/44ADA assessees pay in a single instalment by 15 March; ITR-4 (Sugam) is the return.

Formulas and examples

Example 1 - PGBP from the profit-and-loss account. Mr. Arun's P&L shows a net profit of ₹8,50,000 after debiting: depreciation ₹1,20,000 (allowable under the Act ₹1,55,000), a cash purchase of ₹60,000 paid in one day, a donation of ₹25,000 to a charitable trust, income tax of ₹40,000, interest of ₹30,000 on his own capital, and ₹50,000 paid to a contractor without TDS. Rent of ₹90,000 from a let-out shop is credited.

Example 2 - block of assets with additional depreciation. A manufacturer's 15% plant-and-machinery block has an opening WDV of ₹20,00,000. A new machine costing ₹6,00,000 was bought and used on 10 June 2025, another costing ₹4,00,000 on 15 December 2025, and an old machine was sold for ₹1,50,000.

• WDV of block = 20,00,000 + 6,00,000 + 4,00,000 − 1,50,000 = ₹28,50,000.
• Normal depreciation: on 24,50,000 at 15% = ₹3,67,500; on the December machine 4,00,000 at 7.5% = ₹30,000 → ₹3,97,500.
• Additional depreciation: 6,00,000 × 20% = ₹1,20,000; 4,00,000 × 10% = ₹40,000 (balance ₹40,000 next year) → ₹1,60,000.
• Total depreciation = ₹5,57,500; closing WDV = 28,50,000 − 5,57,500 = ₹22,92,500. (Under s.115BAC/115BAA only the ₹3,97,500 would be allowed.)

Example 3 - s.44AD with mixed receipts. A resident proprietor's turnover for FY 2025-26 is ₹2,80,00,000, of which ₹12,00,000 was received in cash and ₹2,68,00,000 through banking channels before the due date; cash payments are nil.

• 5% of turnover = ₹14,00,000; cash receipts ₹12,00,000 are within it, so the ₹3 crore limit applies and he is eligible.
• Deemed income = 2,68,00,000 × 6% + 12,00,000 × 8% = 16,08,000 + 96,000 = ₹17,04,000.
• His books show an actual profit of ₹9,00,000; to declare that, he must maintain books u/s 44AA and get them audited u/s 44AB, and 44AD is then barred for the following five assessment years. Under 44AD the whole tax is payable as one advance-tax instalment by 15 March 2026.

Example 4 - s.44AE. A transporter owned 8 goods carriages during FY 2025-26: three heavy goods vehicles of 16-tonne GVW and four light vehicles for the full year, and one light vehicle bought on 10 November 2025 (5 part/full months - November to March).

• Heavy: 1,000 × 16 × 12 = ₹1,92,000 each × 3 = ₹5,76,000.
• Other (full year): 7,500 × 12 = ₹90,000 each × 4 = ₹3,60,000.
• Other (part year): 7,500 × 5 = ₹37,500.
• Presumptive income = ₹9,73,500. If it is a firm, partners' interest (up to 12%) and working-partner remuneration within s.40(b) are deducted from this.

Example 5 - s.44ADA: when it pays and when it does not. A chartered accountant's gross receipts are ₹48,00,000, all digital.

• Case A: actual expenses ₹20,00,000 → real profit ₹28,00,000. Presumptive income = 48,00,000 × 50% = ₹24,00,000, i.e. ₹4,00,000 lower; at a 30% marginal rate plus 4% cess the saving is 4,00,000 × 30% × 1.04 = ₹1,24,800, with no books or audit.
• Case B: actual expenses ₹34,00,000 → real profit ₹14,00,000. Declaring ₹14,00,000 is permitted but triggers books u/s 44AA and audit u/s 44AB, since income is below 50% and exceeds the basic exemption limit.

Where it is used

• Tax and audit practice: Big Four and mid-tier firms (Deloitte, PwC, EY, KPMG, BDO, Grant Thornton) staff Tax Audit season on exactly these provisions - Form 3CD clauses mirror ss.40, 40A(3), 43B and 32.
• SME and proprietor compliance: chartered accountants and tax practitioners file ITR-4 under 44AD/44ADA for lakhs of kirana shops, traders, consultants, freelancers and gig-economy professionals.
• Logistics and transport: fleet owners with up to 10 trucks are taxed under 44AE; above 10 vehicles they move to normal computation with depreciation on the vehicle block.
• Bank and NBFC credit appraisal: MSME loan officers read a presumptive ITR knowing the income is a deemed 6%/8% figure, not an audited margin, and therefore ask for GST returns and bank statements as corroboration.
• Industry finance teams: fixed-asset registers, the 180-day cut-off, additional depreciation claims and the 115BAA/115BAB election are routine work for accounts and direct-tax executives.
• Vendor and procurement policy: s.40A(3) drives the "no cash above ₹10,000" rule in accounts-payable manuals, and s.43B(h) has pushed companies to pay MSME vendors within 45 days.

Interview questions

• Q: What are the five conditions for a deduction under s.37(1)? A: The expenditure must not be covered by ss.30-36, must not be capital or personal, must be laid out wholly and exclusively for the business, and must be incurred in the previous year.
• Q: Is CSR expenditure deductible? A: No - Explanation 2 to s.37(1) bars CSR spending under s.135 of the Companies Act, although a qualifying donation may still be claimed under s.35 or s.80G.
• Q: A client paid a supplier ₹45,000 in cash in three instalments of ₹15,000 on the same day. Allowable? A: No - s.40A(3) aggregates payments to one person in one day, so the whole ₹45,000 is disallowed.
• Q: How is depreciation affected if an asset is bought on 1 February? A: It is used for less than 180 days, so only half the normal rate applies in that year; the full rate applies from the next year.
• Q: What is the difference between carrying forward business loss and unabsorbed depreciation? A: Business loss u/s 72 lasts 8 years and only against business income; unabsorbed depreciation u/s 32(2) is indefinite and can be set off against any head except salary.
• Q: Why would a profitable business voluntarily stay out of 44AD? A: If the real margin is below 6-8% the deemed income overstates profit; it may also need to claim brought-forward depreciation or partner remuneration, which 44AD blocks.
• Q: What exactly is the 44AD(4) lock-in? A: If an assessee who once used 44AD declares lower income in any of the next five years, 44AD is unavailable for the five assessment years after that, with books and audit mandatory if income exceeds the basic exemption limit.
• Q: Can an LLP or a company use 44AD? A: No - the scheme is restricted to resident individuals, HUFs and partnership firms, and companies and LLPs are excluded.
• Q: When does the ₹10 crore audit threshold apply instead of ₹1 crore? A: When aggregate cash receipts and aggregate cash payments each stay within 5% of the respective totals; non-account-payee cheques count as cash.
• Q: What did s.43B(h) change? A: From AY 2024-25, amounts payable to micro and small enterprises are deductible only in the year of actual payment unless paid within the MSMED Act limit of 15 days, or 45 days with a written agreement.
• Q: A trader's whole machinery block is sold at a loss. How is it treated? A: No depreciation is allowed; the shortfall against WDV is a short-term capital loss u/s 50, irrespective of how long the assets were held.
• Q: Is a commission agent eligible for 44AD? A: No - income from commission or brokerage and agency business are expressly excluded, so normal computation with books applies.

Common mistakes

• Treating the P&L net profit as business income without the add-back/deduct working, or forgetting to remove rent and interest income taxable under other heads.
• Claiming interest on the proprietor's own capital, or partner remuneration in a 44AD case, both of which are disallowed.
• Applying the 180-day half-rate rule in years after acquisition, or computing depreciation asset-wise instead of on the block.
• Confusing the 44AB audit threshold with the 44AD turnover limit - ₹1 crore/₹10 crore for audit versus ₹2 crore/₹3 crore for the presumptive scheme.
• Disallowing 100% of a resident payment made without TDS when s.40(a)(ia) restricts the disallowance to 30%.
• Charging ₹7,500 per month to a heavy goods vehicle under 44AE instead of ₹1,000 per tonne of gross vehicle weight, or counting only complete months of ownership.
• Assuming 44AD exempts the assessee from advance tax, when the whole liability falls due in one instalment on 15 March, and assuming GST and MSME record-keeping also disappear.

Related topics

Income tax basics · TDS and tax filing basics · Capital gains · Corporate tax basics · GST basics · Financial accounting: final accounts of sole traders and firms