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

Computation of Income from Business or Profession: Step-by-Step Method

Updated 10 October 2026 · Fact-checked

Computation of business income starts with net profit as per the profit and loss account. You add back expenses that are inadmissible or not business expenses, add business income not yet credited, then deduct allowable items not debited and incomes taxable under other heads or exempt. The result is income under the head Profits and gains of business or profession.

Understand Computation of Income from Business or Profession

Your books of account follow accounting rules. The Income-tax Act, 2025 follows tax rules. The two do not match, so the profit in the profit and loss account is only a starting point. You must convert it into taxable business income.

The conversion is done by adjustment. Some debits in the books are not allowed as business deductions, so you add them back. Some items taxable as business income are missing from the books, so you add them. Some credits in the books belong to other heads (house property, capital gains, other sources) or are exempt, so you remove them. Some deductions are allowed under the Act but not debited in the books, such as depreciation worked out on tax rules, so you deduct them.

The Act supports this approach. For insurance business, Schedule XIV itself starts from the profit before tax and appropriations in the profit and loss account and then adds back inadmissible items, and it treats expenditure inadmissible under section 34 as an add-back. The same logic applies to ordinary business: begin with book profit, then adjust for what the Act allows or disallows.

There is also a shortcut for small taxpayers. Under section 58, an eligible assessee with turnover within the limits can offer a deemed profit at a fixed percentage of turnover instead of computing it from books. In that case no adjustment exercise is needed, and other deductions are not allowed against that income.

Exam questions give you a net profit and a list of 8 to 15 items. Your job is to place each item in the right column: add, deduct, or ignore. A neat statement with clear working notes earns most of the marks.

Key rules to remember

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)).

How to solve Computation of Income from Business or Profession questions

Use this fixed layout for any computation question. It keeps your answer in order and lets the examiner award marks for each correct treatment.

1Read the question and find the starting figure: net profit or net loss as per the profit and loss account. Check whether it is before or after the items listed.
2Write the heading: Computation of income from business or profession for the tax year 2026-27. State the assessee and any assumption you make.
3Go through the list of debited items one by one. Add back what is not allowed or not a business expense, such as income-tax, drawings, personal expenses and book depreciation. Allowed items stay as they are.
4Add business income that is taxable but not credited in the books, if any.
5Go through the credited items. Deduct incomes taxable under other heads (house property, capital gains, other sources) and exempt incomes. Items that are business income stay in.
6Deduct allowable items not debited in the books, mainly depreciation computed under the Act. Show depreciation in a working note.
7Total and state the business income. Put every calculation in working notes numbered against the item.
8If the assessee qualifies for section 58, compare the presumptive figure with the profit claimed. Note the audit and books requirement under section 58(3) if a lower profit is claimed and total income exceeds the maximum amount not chargeable to tax.

Quickest way: Two-column tick method

When to use it: Use it when the question lists many items and you have about 20 to 25 minutes for 14 marks.

Copy the net profit. Then rewrite each listed item in one line and tag it A (add), D (deduct) or N (no change).
Mark each item with the reason in two or three words, such as personal, other head, exempt, not allowed.
Add all A items and all D items separately. Then do net profit + total A − total D.
Do the depreciation or other working notes only for items that need numbers.
Recheck that every item in the question appears in your statement. A missed item usually means a lost mark.

Common mistakes in Computation of Income from Business or Profession

Adding back an expense that is actually allowed, or ignoring one that is not.
Students learn the disallowance list only by memory and do not read the item carefully.
Fix: Ask two questions for each debit: is it a business expense, and is it allowed under the Act? Revise the topics on deductions allowed and expenses not deductible alongside this one.
Leaving book depreciation in the profit and also deducting tax depreciation without adding back book depreciation.
Students treat the depreciation in the question as the only one.
Fix: Always add back book depreciation and then deduct depreciation as per the Act. Use the net effect only in a working note, never skip the add-back.
Keeping interest on bank deposits, rent from let-out property or capital gains inside business income.
These items appear as credits in the profit and loss account, so students assume they belong there.
Fix: Remove them from business income and note that they are taxed under their own heads. Do not drop them from the full answer if the question asks for total income.
Treating income-tax, proprietor's drawings and personal expenses as business deductions.
They are debited in the books and look like ordinary charges.
Fix: Add back any item that is tax on the assessee, an appropriation of profit or a personal expense.
Applying section 58 without checking the conditions.
The percentages are easy to remember but the eligibility conditions are not.
Fix: Check residential status, type of assessee, turnover limit, cash receipts and whether the assessee is an eligible assessee as defined in section 58(11) before applying the percentages.
Starting from the wrong profit figure, for example gross profit, or using a net profit that is before an item already given as a debit.
The question wording is read quickly.
Fix: Underline the phrase 'net profit after debiting' or 'before charging' and decide the starting point from it.

Worked examples

Example 1

Mr. Rahul Mehta, a resident trader, shows a net profit of ₹8,40,000 in his profit and loss account for the year ended 31 March 2027. The following items are included: (a) depreciation debited ₹60,000; depreciation allowable as per the Act is ₹85,000; (b) income-tax paid and debited ₹30,000; (c) drawings of the proprietor debited ₹48,000; (d) donation to a charity debited ₹15,000; (e) interest on bank deposit credited ₹20,000; (f) rent from let-out house property credited ₹36,000; (g) gain on sale of land credited ₹1,10,000. Compute his income from business for the tax year 2026-27, assuming that all other expenses are allowable.

Show the solution

Start with net profit as per the profit and loss account: ₹8,40,000.
Add items debited that are not allowed as business deductions: book depreciation ₹60,000, income-tax ₹30,000, drawings ₹48,000, donation ₹15,000. Total ₹1,53,000.
Profit after additions: ₹8,40,000 + ₹1,53,000 = ₹9,93,000.
Deduct items credited that are not business income: interest on bank deposit ₹20,000 (other sources), rent ₹36,000 (house property), gain on sale of land ₹1,10,000 (capital gains). Total ₹1,66,000.
Deduct depreciation allowable as per the Act: ₹85,000. Total deductions: ₹1,66,000 + ₹85,000 = ₹2,51,000.
Business income: ₹9,93,000 − ₹2,51,000 = ₹7,42,000.

Answer: Income from business or profession is ₹7,42,000. Interest of ₹20,000, rent of ₹36,000 and the gain of ₹1,10,000 are taxed under their own heads. The donation may be considered for a deduction from gross total income, if the conditions are met.

Example 2

Mrs. Sunita Rao, a resident individual, runs a retail shop. Her total turnover for the tax year 2026-27 is ₹1,50,00,000. Of this, ₹1,20,00,000 was received by specified banking or online mode during the tax year or before the due date for filing the return. She is an eligible assessee under section 58, her cash receipts are within the limit and she claims profit actually earned of ₹8,00,000. Compute her business income and state the consequence of her claim.

Show the solution

Check eligibility: turnover ₹1,50,00,000 does not exceed ₹2 crore, and she is an eligible assessee. Section 58 (Sl. No. 1) applies.
6% of turnover received by banking or online mode: 6% × ₹1,20,00,000 = ₹7,20,000.
Remaining turnover: ₹1,50,00,000 − ₹1,20,00,000 = ₹30,00,000. 8% of ₹30,00,000 = ₹2,40,000.
Presumptive profit: ₹7,20,000 + ₹2,40,000 = ₹9,60,000.
Compare with profit claimed ₹8,00,000. The Act takes whichever is higher, so ₹9,60,000 applies.
Under section 58(3), the assessee who claims that actual profit is lower than the computed profit and whose total income exceeds the maximum amount not chargeable to tax must keep books under section 62 and get accounts audited under section 63. Her claim of ₹8,00,000 is lower than ₹9,60,000, so this obligation arises if her total income exceeds that limit.

Answer: Business income is ₹9,60,000, being the higher of ₹9,60,000 and the claimed ₹8,00,000. No loss, allowance or deduction is allowed against it. If she wants to declare a lower profit and her total income exceeds the maximum amount not chargeable to tax, she must maintain books and get them audited.

Exam tips

Always draw the statement in a fixed layout with columns for item, add and deduct. A clear layout earns presentation marks even when one treatment is wrong.
Give a short reason for each treatment, such as 'personal, not allowed'. Where you are unsure, state your assumption and move on.
Write depreciation and other numbers in working notes, then carry only the final figure into the main statement.
For MCQs, the adjustment direction is the trick: add back means the item was debited, deduct means it was credited or allowed but not debited. Check this before you calculate.
When the question states the assessee's turnover and receipts, test section 58 first. A quick presumptive computation is often what the examiner wants.

Practice questions from Profits and Gains of Business or Profession

Computation of Income from Business or Profession in other exams

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

Computation of Income from Business or Profession: frequently asked questions

What is the starting point for computing business income?

The starting point is the net profit or loss shown in the profit and loss account. You then add back items not allowed or not business expenses, and deduct items credited that are taxed elsewhere or exempt. You also deduct allowable items not debited in the books.

Do I add back depreciation shown in the books?

Yes. Book depreciation is added back because the Act allows depreciation only on its own rules. You then deduct the depreciation allowable under the Act as a separate step.

What happens to rent, interest or capital gains credited in the profit and loss account?

They are deducted from business income if they are not business income. They are then taxed under house property, other sources or capital gains, as the case may be.

When can I use the presumptive method under section 58?

You can use it only if you are within the assessee, business and turnover conditions given in the section. For general business, you must be an eligible assessee with turnover within the limits and cash receipts within the limits where applicable.

Do I need to keep books if I use section 58?

Not if you accept the presumptive profit. If you claim a lower profit and your total income exceeds the maximum amount not chargeable to tax, section 58(3) requires you to maintain books under section 62 and get them audited under section 63.