Profits and Gains of Business or Profession: formula sheet

Key formulas

Business income from books

Business income = Net profit as per P&L account + Inadmissible expenses debited + Expenses of other heads debited + Book depreciation − Incomes of other heads credited − Allowable items not debited (tax depreciation, etc.)

Always add back book depreciation and then deduct depreciation as per the Act. Show both lines.

Chargeability test

Taxable under this head if: (a) business or profession is carried on at any time in the tax year, and (b) the income is not taxable under another head

The specific receipts listed in the Act are also chargeable under this head.

Partner's income from firm

Taxable = Salary, interest, bonus, commission received from the firm, to the extent allowed as deduction to the firm; share of profit is exempt

Remuneration or interest above the amounts allowed in the firm's computation is not taxed again in the partner's hands.

Tax year

Tax year = 12 months from 1 April; for a new business, the tax year begins on the date of setting up and ends on 31 March.

Tax year is the term used in the Income-tax Act, 2025. Do not use assessment year.

Business income (basic layout)

Business income = Net profit as per books + Inadmissible items debited − Admissible items not debited − Income exempt or taxed elsewhere credited + Business income not credited

Start from book profit and adjust line by line. Show each adjustment separately for step marks.

General tests of allowability

Revenue in nature + Wholly and exclusively for business + Relates to the tax year + Not personal + Not specifically disallowed

If any one test fails, the expense is not allowed under the general provision.

Rent, rates, taxes, repairs and insurance

Allowed = Actual amount paid or payable for premises, plant, machinery, furniture or stock used for business

Repairs must be current repairs. Improvements or renewals that create a new asset are capital and not allowed here.

Interest on borrowed capital

Allowed = Interest on capital borrowed for business

The proviso applies to capital borrowed to acquire a new asset for extension of an existing business or profession. Interest for the period up to the date the asset is first put to use is not deductible. It is capitalised, that is, added to the cost of the asset. Interest for the period after that date is allowed. For a new business, interest on borrowed capital for the period before the business is set up or commenced is not deductible as business expenditure. If it relates to an asset acquired, it is capitalised to that asset's cost.

Bad debts

Allowed if (1) the debt relates to your business, (2) it was taken into income in this or an earlier year, and (3) it is written off as irrecoverable in the books

A mere provision for doubtful debts is not allowed. A loan or advance that was never taken into income earlier is not allowable as a bad debt, unless lending is itself your business. Recovery of a bad debt earlier allowed becomes business income.

Capital vs revenue (guide)

Enduring benefit or new asset → capital. Running expense or stock-in-trade cost → revenue

Treat as a guide only. Decide on the facts of each case.

Block WDV before depreciation

Opening WDV + Actual cost of additions − Sale proceeds (net of transfer expenses)

Do this for each block separately. Never mix blocks with different rates.

Normal depreciation

Rate × (Opening WDV + Additions put to use for 180 days or more − Sale proceeds) + (Rate ÷ 2) × (Additions put to use for less than 180 days − any excess of Sale proceeds over the first bracket)

Set sale proceeds first against opening WDV plus additions used for 180 days or more. Only if sale proceeds exceed that total does the excess reduce the additions used for less than 180 days. If the whole block (opening WDV plus all additions minus sale proceeds) is zero or negative, there is no depreciation, and a negative block gives a short-term capital gain.

Half-rate rule

Rate ÷ 2 on additions put to use for less than 180 days in the tax year

Applies only to additions. The opening WDV always gets the full rate. If sale proceeds exceed the opening WDV plus additions used for 180 days or more, the excess reduces the additions used for less than 180 days.

Common block rates

Residential building 5%; general non-residential buildings 10%; furniture and fittings 10%; plant and machinery 15%; motor cars 15% (30% if used in a business of running on hire); buses and lorries 15% (30% only if used in a business of running on hire); computers and software 40%; intangible assets 25%

Rates vary by class and use. Buses and lorries not used on hire fall in the 15% block. The 30% rate applies only when they are used in a business of running on hire. Purely temporary erections such as wooden structures have a rate of 40%. The rate for ships depends on the type of ship, so it is not listed here. Use the rate given in the question. Check the exact class and use of the asset before applying a rate.

Additional depreciation

20% × Actual cost of new plant or machinery

Only for an assessee engaged in manufacture or production, or in generation, transmission or distribution of power. If the asset is used for under 180 days, claim 10% this year and the other 10% next year. If the question says the assessee has opted for a concessional tax regime, follow the conditions stated in the question.

Short-term capital gain when the block turns negative

Sale proceeds (net of transfer expenses) − (Opening WDV + Additions), if positive

The gain is the excess of net sale proceeds over opening WDV plus additions. It arises even if assets remain in the block. Always short-term, whatever the holding period. No depreciation is allowed on that block.

Block ceasing to exist

STCG or STCL = Sale proceeds (net of transfer expenses) − (Opening WDV + Additions)

If all assets of the block are sold, a positive result is a short-term capital gain and a negative result is a short-term capital loss. Depreciation is nil.

Cost for depreciation

Actual cost = price paid + installation cost − subsidy or grant received

A cash payment above ₹10,000 in a day to one person is excluded from actual cost. Input tax credit claimed under GST is also excluded.

Preliminary expenses

Deduction = 1/5 of eligible expense in each of 5 successive years

This is a separate deduction under its own provision of the Income-tax Act, 2025. It is not a block of assets item, so no WDV is kept and no depreciation rate applies. It covers expenditure incurred before commencement of business, or in connection with extension of an undertaking or setting up of a new unit. It applies to Indian companies and resident non-corporate assessees. Eligible expense is capped at 5% of the cost of the project. A resident non-corporate assessee uses only the cost of the project. For a company, the cap is 5% of the cost of the project or, at the company's option, 5% of the capital employed, as the question provides. Use the base the question gives.

Recovery of an earlier allowed bad debt, loss or expense

Taxable business income = amount recovered, limited to the amount allowed earlier

Taxed in the tax year of recovery, even if the business has closed. No earlier deduction means no tax under this rule. Remission or cessation of a trading liability is covered in the next row.

Trading liability remitted

Business income = benefit obtained from the remission or cessation of the liability, where a deduction was allowed earlier in respect of it, limited to the liability for which that deduction was allowed

Tax the benefit obtained, but not more than the liability for which the earlier deduction was allowed. Applies only to revenue or trading items where a benefit is obtained. Time-barring or a write-back alone is not decisive. Loan principal for a capital asset is generally outside this rule.

Bad debt recovered

Taxable = recovery, up to the bad debt allowed earlier

Recovery of a debt never allowed as a deduction is not taxed under this rule.

Block of assets ceasing to exist

Short-term capital gain or loss = sale proceeds of the block's assets − (WDV of the block, including additions, + expenses on transfer)

This is an exception, not deemed business income. Selling one asset out of a continuing block gives no separate profit or loss, and the proceeds reduce the block's WDV. Expenses on transfer are deducted in every case. If the block ceases to exist by transfer of all its assets, the result is a short-term capital gain when proceeds exceed WDV plus expenses, and a short-term capital loss when proceeds are less. If assets remain in the block, a short-term capital gain arises only when the proceeds exceed the block's WDV plus additions plus expenses on transfer. No loss is recognised while assets remain in the block.

Listed business receipts

Export cash incentive, duty drawback, profit on transfer of licence or entitlement, keyman insurance receipt, compensation on termination or modification of a business contract, benefit or perquisite from business (at its value) = business income

For licences or entitlements only the profit (proceeds less cost, if any) is taxed. A benefit or perquisite is taxed at its value, whether convertible into money or not. For other listed receipts, tax the amount the provision specifies.

Deduction limit

Deduction = Lower of (A) amount deposited in the SBI special account / Site Restoration Account before the end of the tax year and (B) 20% × business profits before this deduction and before deductions under the chapter on deductions from gross total income

Profits mean profits computed under the head business income, so depreciation and other business allowances are already deducted. Check the exact base in the question.

Eligibility

Business of prospecting for / extracting / producing petroleum or natural gas or both in India + agreement with the Central Government

Both conditions must be met.

Timing of deposit

Deposit made on or before the last day of the tax year

A deposit after year end gives no deduction for that year.

Audit condition

Accounts audited by an accountant + audit report furnished with the return

Without these, the deduction is lost.

Withdrawal or misapplication

Amount withdrawn and not used for the scheme's purpose = deemed business profit of the year of withdrawal

Amount used for the scheme's purpose is not taxed again, and the same spending cannot be claimed as a deduction again.

Books of account: specified professions

Gross receipts > ₹1,50,000 in each of the 3 preceding years

For a new profession, the test is expected receipts above ₹1,50,000 in the year. The list is as notified and covers legal, medical, engineering, architectural, accountancy, technical consultancy, interior decoration, authorised representative, film artist, company secretary and other professions notified.

Books of account: other business or profession (individual/HUF)

Income > ₹2,50,000 OR turnover/gross receipts > ₹25,00,000 in any of the 3 preceding years

This is the rule for individuals and HUFs.

Books of account: other business or profession (persons other than individual/HUF)

Income > ₹1,20,000 OR turnover/gross receipts > ₹10,00,000 in any of the 3 preceding years

This is the rule for firms, companies and other persons. Do not apply the individual/HUF figures to them.

Tax audit: business, general limit

Turnover > ₹1 crore

Applies to sales, turnover or gross receipts.

Tax audit: business, enhanced limit

Turnover > ₹10 crore, if cash receipts ≤ 5% of total receipts AND cash payments ≤ 5% of total payments

If either cash test fails, the ₹1 crore limit applies. Count only cash, not banking channels. Above ₹10 crore, audit is required whatever the cash ratios.

Tax audit: profession

Gross receipts > ₹50 lakh

No enhanced ₹10 crore limit for professions.

Tax audit: presumptive case (eligible-business scheme only)

Person has opted for the eligible-business presumptive scheme AND profit claimed < presumptive profit AND total income > basic exemption limit

All three conditions must hold. The eligible-business scheme gives 8% of turnover (6% for turnover received through banking channels and other prescribed electronic modes) and is open only up to turnover of ₹2 crore (₹3 crore if cash receipts are within 5%). This trigger does not cover the 50% professional scheme. A professional claiming less than 50% is tested under the general books and ₹50 lakh rules. Audit also applies to a person who opted out of the eligible-business scheme after opting in, is within the five-year lock-out, and has total income above the basic exemption limit. Books must then be maintained as required and audited.

Penalty for not getting accounts audited or not furnishing the report

Lower of 0.5% of turnover/gross receipts and ₹1,50,000

Applies when the accounts are not audited or the audit report is not furnished. Not levied if you show reasonable cause for the failure.

Penalty for not keeping books

A penalty (₹25,000 under the old law)

Do not quote ₹25,000 as the fixed amount under the Income-tax Act, 2025 unless you have confirmed it. Books must be kept for six years from the end of the relevant tax year. The penalty is also avoidable on proving reasonable cause.

Quick revision

• Start the computation from net profit as per the profit and loss account, then adjust.
• Add back expenses that are not allowed and any amount debited that is not a business expense.
• Deduct income that is taxed elsewhere or not taxable, if it was credited to the profit and loss account.
• Depreciation is computed on the block of assets at the prescribed rate on the written down value.
• Always check whether the book depreciation is added back and the tax depreciation is deducted.
• Check the payment-based disallowances: what matters is whether the payment was made in time or the condition was met.
• Deemed profits and certain receipts are taxed even if they do not look like normal business income.
• Presumptive schemes use a prescribed percentage of turnover or receipts and need eligibility checks.
• Books and tax audit rules depend on turnover or receipts thresholds, so check them against the facts given.
• Show a working note for each adjustment, because step marks depend on it.
• Attempt every MCQ, since wrong answers carry no negative marking.

Common mistakes

• Taking net profit as business income without adjustment Fix: Always run the grid. Net profit is only the starting point.
• Leaving book depreciation in the profit and not adding it back Fix: Add back book depreciation first, then deduct depreciation allowed under the Act. Do both every time.
• Allowing provision for doubtful debts as a bad debt deduction. Fix: Allow only debts actually written off as irrecoverable in the books. Add back any general or specific provision.
• Treating all repairs as revenue expenditure. Fix: Check if the work is current repair or an improvement or new asset. Improvements are capital. Only current repairs are allowed.
• Treating a sale of one asset as a capital gain or loss. Fix: For a block, reduce the block WDV by the sale proceeds. A gain or loss arises only if the block turns negative or ceases to exist.
• Applying the half rate to the whole block. Fix: Apply the half rate only to additions put to use for under 180 days. The opening WDV net of sale gets the full rate.
• Taxing a recovery or remission when no deduction was allowed earlier. Fix: Always check the earlier deduction first. No deduction, no tax under this rule.
• Taxing waiver of a loan taken to buy a capital asset as a remitted trading liability. Fix: Only a trading or revenue liability is covered. Check what the liability was for.
• Allowing the full deposit as deduction without applying the 20% cap. Fix: Always compute 20% of profit and take the lower of the two. Write both figures in your working.
• Computing 20% on profit after deducting the site restoration deduction or other deductions in the chapter on deductions from gross total income. Fix: Use business profit before this deduction and before the chapter deductions. The base is circular if you deduct first.

Exam tips

• Write the full adjustment grid even for small questions. Examiners award marks for each correct treatment.
• Treat every credit in the P&L with suspicion. If it is rent, interest on securities, dividend or capital gain, it moves to another head.
• Use tax year and the Income-tax Act, 2025 terminology throughout. Give a section number only if you are sure of it.
• In theory questions on chargeability, list the specific receipts the Act taxes as business income and give one line of explanation for each.
• In MCQs, check the head first. Many wrong options differ only in which head the item falls under.
• Write the reason for each allow or disallow decision in a few words. Step marks depend on correct treatment, not only the final figure.
• In MCQs, watch for the word 'provision'. Provisions for bad debts are usually not allowed, but actual write-offs usually are.
• Check the timing of interest on borrowed capital. If the loan is for a new asset for extension of an existing business, interest before the asset is first put to use is capitalised and not deductible, and interest after use is allowed.