Profits and Gains of Business or Profession: formula sheet

Key formulas

Basic charge

Business income = profits and gains of any business or profession carried on at any time during the tax year (section 26(2)(a))

Applies even if the business ran for only part of the year.

Method of accounting

Income computed by cash or mercantile system regularly employed, subject to notified standards (section 276(1) and (2))

Applies to business or profession and to income from other sources.

Assessing Officer's power

Assessment in manner provided in section 271 if (a) accounts not correct or complete, (b) method not regularly followed, or (c) notified standards not applied (section 276(3))

All three triggers are alternatives.

Speculation business

Speculation business is deemed distinct and separate from any other business (section 26(3))

Matters later for set-off of losses.

Letting of residential house

Income from letting out a residential house or part by the owner is taxed only under house property (section 26(4))

Not business income.

Partner's remuneration

Partner's income = interest, salary, bonus, commission or remuneration due or received, to the extent allowed to the firm under section 35(e) (section 26(2)(g))

Only the allowed portion is the partner's business income.

Member's share in AOP/BOI (determinate shares)

Share = (AOP income − payments to members) × sharing ratio + payments to that member; if the apportioned amount is a loss, adjust the payments against it (section 309(2))

Interest paid by the member on capital borrowed to invest in the AOP/BOI is deducted from his share (section 309(4)).

Depreciation on a block of assets

Depreciation = prescribed rate × WDV of the block

Section 33(3)(a). Rate is applied on WDV of the block, not on each asset's cost. The rate will be given in the question.

Half-year rule

Depreciation = 50% × prescribed rate × WDV, for an asset acquired in the tax year and used for less than 180 days

Section 33(4). Applies to the asset acquired and used for less than 180 days in that tax year.

Additional depreciation

20% of actual cost of new machinery or plant (10% if used for less than 180 days, balance 10% in the next tax year)

Section 33(8) and (9). Only for manufacturers/producers or power generation, transmission and distribution businesses, and for new machinery or plant meeting the conditions. Conditions (i) to (iv) of section 33(8)(d) apply to machinery or plant other than a ship or an aircraft: it must not have been used earlier by another person, must not be installed in office premises or residential accommodation, must not be an office appliance or road transport vehicle, and must not be an asset whose whole actual cost is allowed as a deduction.

Part business use

Allowable = total expense × business-use proportion

Section 28(2) for rent, repairs, insurance and taxes; section 33(3)(b) for depreciation.

Deficiency on sale or discard of a tangible asset of a power undertaking (section 33(10))

Deduction = WDV − (moneys payable including scrap value), only if moneys payable including scrap value are less than the WDV

Section 33(10) applies to a tangible asset of an undertaking engaged in generation, or generation and distribution, of power, where depreciation is claimed and allowed under section 33(2) as a percentage of actual cost. The asset must be sold, discarded, demolished or destroyed in a tax year other than the year it is first put to use, and the deficiency must be actually written off in the books of account.

Unabsorbed depreciation

Depreciation allowed only up to available profits; the balance is added to the next year's depreciation

Section 33(11). If profits are a loss, no depreciation is allowed in that year, and it carries forward as per the section.

Leased building improvements

Capital expenditure on structure or renovation of a leased building is treated as a building owned by you

Section 33(6). Depreciation is then claimed on it.

Specified person payments (section 36(2))

Disallowed = Expenditure − reasonable amount (by fair market value, business needs, benefit derived)

Applies to payments to a specified person: relative of an individual; director or relative for a company; partner or relative for a firm; member or relative for an AOP or HUF; and persons with substantial interest.

Substantial interest (section 36(3)(b))

Company: beneficial owner of shares carrying ≥ 20% voting power. Others: beneficially entitled to ≥ 20% of profits.

Test is at any time during the tax year. Shares with a fixed rate of dividend do not count.

Cash payment limit (section 36(4))

Payments in a day to one person > ₹10,000 not via specified banking or online mode → entire such expenditure disallowed

Limit is ₹35,000 for plying, hiring or leasing of goods carriages (section 36(6)). The test is per day, per person, aggregated.

Earlier-year liability paid in cash (section 36(5))

Payment in a day to a person > ₹10,000 (₹35,000 for goods carriages) not via specified mode, for a liability already deducted earlier → deemed business income of the payment year

Do not disallow again; it is taxed as income in the year of payment.

Actual payment items (section 37(2))

Allowed only in the tax year paid: taxes, duties, cess, fees; employer contributions to PF, superannuation, gratuity or welfare funds; leave encashment; interest to specified financial entities; railway dues; MSME payments beyond section 15 time limit

Section 37(3): items other than the MSME payment, if paid by the section 263(1) return due date, are allowed in the year incurred.

Gambling and winnings (section 94(4))

Income from lotteries, games, gambling, betting: no deduction for related expenditure

Exception: owner of horses maintained for running in races, for owning and maintaining them (section 94(5)).

Deduction for deposit

Deduction = Lower of (Amount deposited in the year ; 20% × Profits of the oil/gas business before this deduction)

Compute profits under Profits and Gains of Business or Profession first. The cap is 20% of those profits, not of total income. The deposit must be made before the due date for furnishing the return.

Who is eligible

Assessee in petroleum / natural gas prospecting, extraction or production in India under a Central Government agreement

No other business qualifies. State this condition at the start of your answer.

Where to deposit

Deposit in the specified site restoration account or notified scheme, before the due date for furnishing the return of income

A deposit elsewhere, or after the due date, earns no deduction.

Withdrawal used for restoration

Amount withdrawn and applied for the approved restoration purpose: not taxed on withdrawal; the restoration expenditure is not allowed as a deduction again

The deduction was already allowed at deposit time. This holds only if the withdrawal is applied for the approved purpose.

Withdrawal not used for the purpose

Amount withdrawn and not utilised for the approved purpose (including balance on closure) = business income of the year of withdrawal

Add it to the business income of that year, whether or not the business made a profit.

Serial 1: general business, turnover limit

Turnover ≤ ₹2,00,00,000; or ≤ ₹3,00,00,000 if cash receipts ≤ 5% of total turnover

Cash includes non-account-payee cheques or drafts (sub-section (9)).

Serial 1: presumptive profit

(6% × turnover received by specified banking or online mode by the due date under section 263(1)) + (8% × remaining turnover); or actual profit, whichever is higher

Digital receipts get 6%. All other turnover gets 8%.

Serial 3: profession, receipts limit

Gross receipts ≤ ₹50,00,000; or ≤ ₹75,00,000 if cash receipts ≤ 5% of gross receipts

Assessee must be a resident individual or firm other than an LLP.

Serial 3: presumptive profit

50% × gross receipts; or actual profit, whichever is higher

Applies to the specified profession in section 62(4).

Serial 2: heavy goods vehicle (gross weight over 12,000 kg)

₹1,000 × tons of gross vehicle weight or unladen weight × months or part months owned

Owner must own not more than ten goods carriages at any time in the tax year.

Serial 2: other goods carriage

₹7,500 × number of vehicles × months or part months owned

Compare with actual profit claimed; the higher applies.

Firm partners

Firm income = presumptive profit − partners' salary and interest (within section 35(e) limits)

Sub-section (5) allows this deduction for serial 2 firms.

Opt-out lock-in

If you declare lower profit in any of the next five tax years, you lose the scheme for five tax years after the default year

Sub-section (7) applies to serial 1; audit follows if total income exceeds the basic exemption (sub-section (8)).

Current-year set off of speculation loss (section 113(1))

Speculation loss ≤ set off only against profits of another speculation business

It cannot be set off against any other business income or any other head.

Carry forward of speculation loss (section 113(2))

Unabsorbed speculation loss → next tax year → set off against speculation profits only → repeat

Carry forward is of the loss not set off, in the following tax years.

Time limit for speculation loss (section 113(3))

Maximum 4 tax years immediately succeeding the loss year

Count from the year after the loss was first computed.

Ordinary business loss carry forward (section 112)

Loss not set off under section 109 → carried forward → set off against business or profession profits of later years, up to 8 tax years

The loss must not be a speculation loss. It can be set off against any business profit, including speculation profit.

Specified business loss (section 114)

Set off only against profits of another specified business; unabsorbed balance carried forward against specified business profits

The supplied text of section 114 states no number of years.

Company share dealing (section 113(5) and (6))

Company deemed in speculation business to the extent of purchase and sale of shares of other companies, unless an exception applies

Exceptions: gross total income mainly from house property, capital gains or other sources; or principal business is share trading, banking or granting loans and advances.

Business income from the P&L account

Net profit as per P&L + Inadmissible and non-business debits + Business income not credited − Allowable items not debited − Incomes credited but taxable under other heads or exempt = Income from business or profession

Start with net profit after tax and appropriations are treated as add-backs. If the books show a net loss, start with the loss as a negative figure.

Presumptive income, general business (section 58, Table Sl. No. 1)

Higher of (6% × turnover received by specified banking or online mode + 8% × remaining turnover) and profit actually earned, as claimed

Applies to an eligible assessee. Turnover limit is ₹2 crore, or ₹3 crore if cash receipts do not exceed 5% of turnover. Check the full conditions before applying.

Presumptive income, specified profession (section 58, Table Sl. No. 3)

Higher of 50% of gross receipts and profit actually earned, as claimed

Limit is ₹50 lakh, or ₹75 lakh if cash receipts do not exceed 5% of gross receipts. Applies to a specified assessee carrying on a specified profession.

Presumptive income, goods carriage (section 58, Table Sl. No. 2)

Heavy goods vehicle: ₹1,000 per ton per month or part. Other goods carriage: ₹7,500 per vehicle per month or part. Or profit actually earned, whichever is higher

Applies to an assessee owning not more than ten goods carriages at any time in the tax year. A heavy goods vehicle has gross vehicle weight above 12,000 kg.

Loss, allowance and deduction under presumptive scheme (section 58(4))

No loss, allowance or deduction is allowed against income computed under section 58(2)

Depreciation is treated as already allowed, so written down value is reduced as if depreciation was claimed (section 58(6)).

Quick revision

• Business income is computed by starting from book profit and adjusting it for allowed and disallowed items.
• Learn each deduction together with its condition. A missing condition is the usual reason an item is disallowed.
• Schedule X applies to an assessee carrying on prospecting for, or extraction or production of, petroleum or natural gas in India under an agreement with the Central Government.
• Site Restoration Fund deduction is the lower of the amount deposited or 20% of business profits before this deduction.
• The Schedule X deduction is allowed before set-off of brought-forward losses under section 112.
• Interest credited to the specified account is deemed to be a deposit.
• The accounts must be audited by an accountant before the specified date in section 63, and the audit report must be furnished by that date.
• An amount withdrawn on closure is taxed as business profits, after reducing any profit or production share payable to the Central Government.
• An amount withdrawn for business use but not used in that tax year is deemed business profits of that year.
• If an asset acquired under the scheme is sold within eight years from the end of the tax year of acquisition, the part of its cost relatable to the deduction is taxed. The sale to the Government, a local authority, a statutory corporation or a Government company is excluded.
• A partner or member cannot claim the Schedule X deduction a second time when the firm, AOP or BOI has already claimed it.
• Use the Income-tax Act, 2025 terms: tax year, not assessment year.

Common mistakes

• Taxing the whole gross receipt instead of net profit. Fix: Section 26(2)(a) taxes profits and gains. Deduct allowable expenses before arriving at business income.
• Treating compensation for termination of an agency or contract as a capital receipt. Fix: Section 26(2)(b) makes such compensation business income when received in connection with termination or modification of terms of management, office, agency or contract.
• Allowing capital repairs as revenue deduction. Fix: Ask whether the spend creates a new asset or lasting benefit. If yes, it is capital; only depreciation applies.
• Claiming repairs for a rented premises in all cases. Fix: For a tenant, repairs are allowed only if you have undertaken to bear the cost of repairs. Rent itself is allowed.
• Disallowing only the excess over ₹10,000 in a cash payment. Fix: Under section 36(4), once the day's payment to a person exceeds ₹10,000 without specified mode, the whole expenditure by way of such payments is disallowed.
• Testing each bill separately for the cash limit. Fix: Aggregate all payments made in a day to the same person. Different days are tested separately.
• Claiming the full deposit even when it exceeds 20% of profits. Fix: Always compute both figures and write 'lower of' in your working.
• Calculating 20% on total income or gross total income. Fix: Use profits of the eligible business under the business head, before this deduction.
• Applying 6% to all turnover Fix: Apply 6% only to turnover received by specified banking or online mode by the due date under section 263(1). The rest is 8%.
• Using the ₹3 crore limit without testing cash Fix: Cash must not exceed 5% of turnover. If it does, the limit is ₹2 crore.

Exam tips

• In MCQs, hunt for the trigger words: agency termination, export incentive, Keyman policy, non-compete, residential house let out. Each maps to a specific clause of section 26.
• In written answers, cite the section for each item and give the head of income. This earns step marks even if the final figure slips.
• State the accounting method in one line before any computation. Examiners reward it.
• Use "tax year" and Income-tax Act, 2025 section numbers. Do not write "previous year" or "assessment year" as the charging period.
• Keep speculation income in a separate column or line in computations.
• Write the section number beside each allowed item. Under the 2025 Act, use section 28 for rent, rates, taxes, repairs and insurance, and section 33 for depreciation.
• Show the block WDV working in a small table. Step marks go to the opening balance, additions and rate.
• Always state why an item is disallowed or capitalised, in one line.