Tax Laws and Practice · Profits and Gains from Business and Profession

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

Updated 11 October 2026 · Fact-checked

Business income is the profit of any business or profession you carry on during the tax year, plus items the Act treats as business income. You compute it as receipts less allowed expenses, using the method of accounting you regularly follow (cash or mercantile). Start with chargeability, then basis, then deductions and disallowances.

Understand Chargeability and Basis of Business Income

Income-tax Act, 2025 classifies income under five heads: Salaries, Income from house property, Profits and gains of business or profession, Capital gains, and Income from other sources. This page deals with the third head. It applies when you carry on a business or profession at any time during the tax year. Income from a trade, a manufacturing unit, a consultancy practice or a shop is taxed here, not under salary or other sources.

The head does not tax turnover. It taxes profit. You start with the receipts of the business, subtract the expenses the Act allows, and add back items it disallows. Some receipts that are not normal sales are also treated as business income by specific provisions. Examples are compensation on termination of a contract and certain benefits arising from the business. Learn these as a list of specific inclusions.

The tax year is the twelve-month period beginning on 1 April. Income is charged for the tax year in which it is received or accrues, according to the method of accounting you regularly follow, and the return is filed for that tax year. A business that starts mid-year is taxed on its profit from the start date to 31 March.

The basis of accounting decides which year an item belongs to. Under the cash basis, you record income when you receive it and expense when you pay it. Under the mercantile basis, you record income when it accrues and expense when it is incurred, whether or not cash has moved. You must follow the method regularly. You cannot switch each year to get a better result.

The cash basis is not open to everyone. A company, and any other assessee that must keep accrual accounts under the law that applies to it, cannot use the cash basis. Such an assessee must follow the mercantile basis.

Some special rules override the normal scheme. For example, Schedule X gives a deduction to oil and gas businesses for a site restoration fund. It is allowed only on conditions, and it is withdrawn if the money is misused. Such rules show how the computation scheme can be modified by specific provisions.

Key rules to remember

Business income (basic scheme): Business income = Receipts chargeable − Allowable expenses and depreciation + Amounts disallowed or deemed as income; This is the logic, not a section formula. Always show the adjustments one by one.
Tax year: Tax year = 12 months starting 1 April; A business set up during the year is taxed from its start date to 31 March. Income is charged for the tax year in which it is received or accrues, as per the method regularly followed.
Basis of accounting: Cash basis: receipts and payments. Mercantile basis: accrual and incurrence; The method must be regularly followed. Companies and others required by law to keep accrual accounts cannot use the cash basis. Some deductions are allowed only on payment, whichever method you use.
Site restoration fund deduction (Schedule X, para 1): Deduction = lower of (a) amount deposited in the specified account and (b) 20% of business profits before this deduction; Allowed before set off of brought-forward loss. Interest credited to the account is deemed to be a deposit.
Deemed profit on closure of specified account (Schedule X, para 3(3)): A = B − C; A = deemed business profit of that tax year, B = amount withdrawn on closure, C = amount payable to the Central Government as profit or production share under the agreement.

How to solve Chargeability and Basis of Business Income questions

Use this order for any theory or numerical question on chargeability and basis. It keeps your answer in the provision, analysis, conclusion form.

1Identify the head. Ask whether a business or profession is carried on during the tax year, and state the provision that charges it.
2Check whether the receipt is a normal business receipt, a specific inclusion (such as compensation or a benefit from the business), or a capital receipt that is not business income.
3Fix the tax year. Note the start date if the business began mid-year.
4Identify the accounting basis given. If the question is silent, state the assumption (usually mercantile) and say why.
5Start with the profit shown in the books, then add back disallowed items and deduct allowed items not yet debited.
6Apply any special provision given in the facts, such as the Schedule X site restoration deduction, and check its conditions.
7Write the conclusion with the final amount of business income and name the head.

Quickest way: Three-question filter

When to use it: Use it for short-answer questions and for MCQ-style case facts inside a descriptive paper.

Is a business or profession being carried on in the tax year? If no, it is not this head.
Which basis applies, and which year does each item belong to? Move items to the correct year first.
Does any special rule change the amount? For Schedule X, take the lower of the deposit and 20% of profits before the deduction.

Common mistakes in Chargeability and Basis of Business Income

Taxing turnover instead of profit.
Students see large receipts and stop at the sales figure.
Fix: Always end with receipts less allowed expenses. Show the profit line clearly.
Ignoring the basis of accounting and mixing cash and mercantile items.
Facts contain both received and receivable amounts, and students treat them alike.
Fix: Write the basis at the top and classify every item against it before adding.
Taxing a business from 1 April when it began later.
Students assume a full year by default.
Fix: Use the actual start date. The business is taxed for the part of the tax year it operated.
Computing the Schedule X deduction on profit after deducting brought-forward losses.
Students apply loss set off first, as in normal computation.
Fix: The deduction is allowed before set off of brought-forward loss. Use profit before this deduction, and set off losses afterwards.
Allowing the Schedule X deduction without checking conditions.
The deduction looks automatic once a deposit is made.
Fix: Check that the assessee is in petroleum or natural gas business under an agreement with the Central Government, deposited before year end in the specified account, and got accounts audited and filed the report by the specified date.
Forgetting that withdrawn amounts not used for the scheme's purpose become income.
Students stop after the deduction year.
Fix: Remember that money released or withdrawn and not utilised in that tax year is deemed business profit of that year. Also, expenditure met from the account is not deductible again.

Worked examples

Example 1

Sharma Traders, Pune, follows the mercantile system. For the tax year it made sales of ₹12,00,000, of which ₹2,00,000 is still receivable. It incurred business expenses of ₹7,00,000, of which ₹1,00,000 is unpaid at year end. Assume all expenses are allowable. Compute business income and state the result if the cash basis were used.

Show the solution

Basis: mercantile, so income is recorded when it accrues and expenses when incurred.
Income: ₹12,00,000, including the ₹2,00,000 receivable.
Expenses: ₹7,00,000, including the ₹1,00,000 unpaid.
Profit = ₹12,00,000 − ₹7,00,000 = ₹5,00,000.
Cash basis comparison (only for an assessee who is allowed to use it): receipts = ₹12,00,000 − ₹2,00,000 = ₹10,00,000. Payments = ₹7,00,000 − ₹1,00,000 = ₹6,00,000. Profit = ₹4,00,000.

Answer: Business income under the mercantile basis is ₹5,00,000. Under the cash basis it would be ₹4,00,000, assuming no other adjustments and assuming the assessee is allowed to use that basis. A company or any assessee bound to keep accrual accounts cannot use it. The method must be the one regularly followed.

Example 2

Deepak Petroleum Ltd carries on petroleum extraction in India under an agreement with the Central Government. Its business profit before the site restoration deduction is ₹50,00,000. It deposited ₹8,00,000 in the specified account before the end of the tax year and met all audit conditions. It has a brought-forward business loss of ₹10,00,000. Compute the deduction and income after loss set off.

Show the solution

Basis: Deepak Petroleum Ltd is a company and must keep accrual accounts, so it follows the mercantile basis. The profit of ₹50,00,000 is taken on that basis.
Conditions: petroleum business under an agreement, deposit before year end, audit report filed. All are met, so the deduction is available.
Limit (a): amount deposited = ₹8,00,000.
Limit (b): 20% of ₹50,00,000 = ₹10,00,000.
Deduction = lower of the two = ₹8,00,000.
The deduction comes before set off of brought-forward loss.
Profit after deduction = ₹50,00,000 − ₹8,00,000 = ₹42,00,000.
After set off of brought-forward loss: ₹42,00,000 − ₹10,00,000 = ₹32,00,000.

Answer: The deduction is ₹8,00,000 and business income after loss set off is ₹32,00,000. Note that the deduction is not allowed again for the same amount in any other tax year.

Exam tips

Open every answer with the provision: business or profession carried on during the tax year is charged under this head. Then apply facts and conclude.
State your assumption on the accounting basis when the question is silent. Examiners reward a clear assumption.
For Schedule X, write the three tests: eligible business, deposit in the specified account before year end, and audit report filed. Then compute the lower of deposit and 20%.
Show each adjustment on a separate line in numericals so you earn step marks even if one figure is wrong.
Do not cite section numbers unless you are sure of them. Naming the provision in words is safer than a wrong number.

Practice questions from Profits and Gains from Business and 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 chargeable under the head profits and gains of business or profession?

The profit of any business or profession you carry on during the tax year is chargeable. Certain specific receipts, such as compensation connected with the business, are also treated as business income. Learn the list of inclusions from the Act.

What is the difference between cash and mercantile basis?

Under the cash basis you record income when received and expense when paid. Under the mercantile basis you record them when they accrue or are incurred. You must follow the chosen method regularly. Companies and others required by law to keep accrual accounts cannot use the cash basis.

What is the tax year for business income?

The tax year is the twelve months beginning on 1 April. Business income is charged for the tax year in which it is received or accrues, according to the method of accounting regularly followed. If the business starts mid-year, only the period from its start is taxed.

Is the site restoration deduction calculated before or after setting off earlier losses?

It is allowed before set off of brought-forward losses. You take the lower of the amount deposited and 20% of the profits before this deduction. Then you apply loss set off to the remaining profit.