Direct and Indirect Taxation · Profits and Gains of Business or Profession

Chargeability and Basis of Business Income under the Income-tax Act, 2025

Updated 10 October 2026 · Fact-checked

Business income is the profit of any business or profession carried on during the tax year, plus the specific items listed in section 26 of the Income-tax Act, 2025. Under section 276, you compute it by the cash or mercantile method the assessee regularly employs. Check each receipt against section 26, then apply the method.

Understand Chargeability and Basis of Business Income

Start with the idea. The Act taxes income under heads. One head is "Profits and gains of business or profession". Section 26 says which incomes fall under it. Your first job in any question is to decide whether a receipt belongs here or under another head.

The basic charge is section 26(2)(a): profits and gains of any business or profession carried on by the assessee at any time during the tax year. Note the words "at any time during the tax year". The business need not run for the whole year. Profit is the net result after allowable expenses, not the gross receipts.

Section 26 then adds specific items that are also business income. These are mostly receipts that look like capital or windfall items but are deliberately taxed here. Examples: compensation on termination of management, agency or business contract; profits on sale of import licence, cash assistance against export, duty drawback or other export incentive; the value of any benefit or perquisite from business or profession, in cash or kind; a partner's interest, salary, bonus, commission or remuneration from the firm, to the extent allowed to the firm under section 35(e); sums received for agreeing not to carry on an activity or not to share know-how and similar rights (with listed exceptions); and sums under a Keyman insurance policy, including bonus.

Two more rules matter. Under section 26(3), a speculation business is deemed distinct and separate from any other business. Under section 26(4), rent from letting out a residential house by its owner is not business income. It is chargeable only under "Income from house property".

How you compute the profit is governed by section 276. Income is computed by the cash or mercantile system of accounting regularly employed by the assessee, subject to notified income computation and disclosure standards. If the accounts are unreliable, the method has not been regularly followed, or the notified standards were not applied, the Assessing Officer may make an assessment in the manner provided in section 271.

Key rules to remember

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)).

How to solve Chargeability and Basis of Business Income questions

Use this order for any question on chargeability and basis of business income.

1Read each receipt and ask: is it from a business or profession carried on during the tax year? If yes, section 26(2)(a) applies.
2If not, check whether it is one of the specific items in section 26(2)(b) to (k), such as export incentives, Keyman policy sums or non-compete receipts.
3Check the exclusions: a residential house let out by its owner goes to house property (section 26(4)); sale of a capital asset normally goes to capital gains.
4Identify the accounting method the assessee regularly employs, cash or mercantile, and apply it consistently to income and expenses.
5Check whether any notified income computation and disclosure standard applies to the item.
6Treat any speculation business separately from other businesses.
7For a partner or AOP/BOI member, compute the share using the section 26(2)(g) and section 309 rules.
8Write the head, the section, the amount and the reason in one line each.

Quickest way: Three-question screen

When to use it: Use for short MCQs and for classifying items inside a long computation.

Is it profit from a business or profession run during the tax year? Then it is business income.
If not, is it named in section 26(2)(b) to (k)? Then it is still business income.
Is it rent of a residential house let by the owner? Then it is house property, whatever the owner's trade.

Common mistakes in Chargeability and Basis of Business Income

Taxing the whole gross receipt instead of net profit.
Students read section 26 as a list of receipts.
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.
It feels like a one-time payment.
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.
Taxing the full partner's remuneration in the partner's hands.
Students ignore the limit in section 26(2)(g).
Fix: Only the amount allowed to the firm under section 35(e) is the partner's business income.
Showing house rent under business income because the owner is a businessman.
Confusion between the person and the nature of the income.
Fix: Section 26(4) sends letting of a residential house by the owner only to house property.
Mixing cash and mercantile methods within one computation.
Students book some items when received and others when due.
Fix: Apply the one regularly employed method throughout, as section 276(1) requires.
Merging speculation profit with other business income.
Both are called business.
Fix: Section 26(3) deems speculation business distinct and separate. Show it as a separate business.

Worked examples

Example 1

Rohan Mehta runs a trading business. In the tax year he receives ₹8,00,000 as compensation for termination of an agency he held in India for another person's business, ₹40,000 as duty drawback, and ₹1,20,000 as rent from letting out his own residential house. Identify which items fall under business income and the amount.

Show the solution

Compensation of ₹8,00,000 is received in connection with termination of an agency held in India. It falls under section 26(2)(b)(ii). It is business income.
Duty drawback of ₹40,000 is named in section 26(2)(e). It is business income.
Rent of ₹1,20,000 is from letting a residential house by its owner. Section 26(4) excludes it from business income. It is taxed under house property.
Business income from these items = ₹8,00,000 + ₹40,000 = ₹8,40,000.

Answer: ₹8,40,000 is chargeable as business income (before allowing any related expenses). The ₹1,20,000 rent is taxed under house property.

Example 2

Anita and Bhavna are members of an AOP with determinate shares of 60% and 40%. Income of the AOP before any payment to members is ₹5,00,000. Anita is paid interest of ₹50,000 by the AOP for the tax year, and it is deducted in arriving at that income only as per section 309. Compute Anita's and Bhavna's shares. Assume the ₹5,00,000 is the income before deducting the interest.

Show the solution

Under section 309(2)(a), deduct the interest paid to the member: ₹5,00,000 − ₹50,000 = ₹4,50,000.
Apportion the balance in the sharing ratio. Anita: 60% of ₹4,50,000 = ₹2,70,000. Bhavna: 40% of ₹4,50,000 = ₹1,80,000.
Under section 309(2)(b)(i), add the interest to the apportioned profit of the member who received it. Anita: ₹2,70,000 + ₹50,000 = ₹3,20,000.
Bhavna received no payment, so her share stays ₹1,80,000.
Check: ₹3,20,000 + ₹1,80,000 = ₹5,00,000.

Answer: Anita's share is ₹3,20,000 and Bhavna's share is ₹1,80,000.

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.

Practice questions from Profits and Gains of Business or Profession

Chargeability and Basis of Business Income in other exams

The same ground in other exams, if you are preparing for more than one or want another angle on it.

Chargeability and Basis of Business Income: frequently asked questions

What is the difference between business income and professional income?

Both are taxed under the same head, "Profits and gains of business or profession". Business is generally trade, commerce or manufacture. Profession depends on skill, such as that of a doctor or a chartered accountant. The charging rule in section 26(2)(a) covers both.

Which accounting method does the Income-tax Act, 2025 allow for business income?

Section 276(1) allows either the cash or the mercantile system, whichever the assessee regularly employs. It is subject to any income computation and disclosure standards notified by the Central Government.

When can the Assessing Officer reject the books of account?

Under section 276(3), the officer may make an assessment in the manner provided in section 271 if he is not satisfied about the correctness or completeness of the accounts, the method was not regularly followed, or notified standards were not applied.

Is rent from a house let out by a trader business income?

No for a residential house let out by its owner. Section 26(4) says it is chargeable only under income from house property.