Income from business and profession – Meaning and taxability

Income from Business and Profession

What is business and profession?

Income from a business or profession is only taxable if the taxpayer operated the business or profession at some point in the previous year. First, let’s see what is Business

In simple words, a business is any employment that a person engages in with the intention of making a profit. Business does not include earnings from a partnership firm or a profession. The business consists of any –

  • Trade,
  • Commerce, 
  • Manufacturing, 
  • Even providing services to other people is regarded as a business.

For example:  managing a hotel, transportation company, travel agency, share brokering, etc.

A profession can be defined as a job that involves thought, skill, and special knowledge. Therefore, profession refers to those activities where a person earns their livelihood through intellectual or manual skills, such as:

Therefore, Profession refers to activities where persons earn a living by using their intellect or manual ability, such as:

  • Legal
  • Medical
  • Engineering
  • Chartered Accountant
  • Architectural etc.

Charge of income under Business or Profession

The chargeable income under “Profits and gains of business or profession” is given below:

  1. The profits and gains from any business/profession carried on by the assessee at any time during the previous year
  2. Any compensation /other payment due to or received by, —any person, by whatever name, manage the whole or significant whole of the affairs of an Indian company, at or connected to the termination of his management or the modification of the terms and conditions
  3. Income obtained by a trade, professional or similar association from specific services performed for its members
  4. The value of any perquisite/benefit from business or profession, whether it is convertible into money or not
  5. Any interest, commission, salary, remuneration, or bonus due to, or received by, a partner of a firm from a firm
  6. Any sum that is received under a Keyman insurance policy including the sum given as a bonus
  7. Income from any speculative transactions
  8. Any sum, whether received / receivable, in cash/kind for:
    1. For not carrying out any activity concerning any business or
    2. For not sharing any know-how, patent, copyright, trade-mark, licence, franchise or any other business/ commercial right
  9. Any profit that is made from the transfer of the Duty-Free Replenishment Certificate
  10. Any profit made from the transfer of the Duty Entitlement Pass Book Scheme
  11. Profits that are made from the sale of a license granted under the Imports (Control) Order, 1955, made under the Imports and Exports (Control) Act, 1947 (18 of 1947)

Expenses allowable from Business and Profession Income

Expenses incurred wholly and exclusively in connection with the business and profession shall be deducted from the business and profession’s income.

Below is a list of some of the expenses:

  • A building’s rent and insurance
  • payments for professional and legal services.
  • Employee compensation, bonuses, commissions, etc.
  • Working partners may receive interest and compensation under specific circumstances.
  • travel and transportation costs.
  • Membership fees.
  • Payment for patents, copyrights, trademarks, and licences.
  • Depreciation on fixed assets.
  • Expenditures on scientific research for business purposes.
  • preliminary costs in the case of a business.
  • Communication expenses 
  • Discounts allowed to customers 
  • Advertisement expenses in respect of the promotion of business products.
  • Financial Charges (eg. Interest on loans).
  • Expenses related to bank fees and commissions.
  • Expenses for entertainment and business promotion.
  • Staff Welfare expenses.
  • Stationery and printing costs.
  • Postage costs.
  • all additional costs associated with your job or business.

Further, all of these expenses are allowed on both a cash basis as well as an accrual basis as of account closing. For example:  An employee receives pay in April 2020 for the month of March 2020. However, since this income relates to the Financial Year 2019–20 (which closes on March 31, 2020), it can be deducted from the income from the business/professional income of the Financial Year 2019–20.

Expenses allowed only on a payment basis

Listed below are a few instances of these costs:

  • Any taxes, duty, cess or fees by whatever name is called. Any kind of tax, charge, cess, or levy, regardless of its name.
  • Expenses for contributions to the provident fund, employee state insurance premiums, gratuity fund, or other funds for the welfare of the employees.
  • Payments to employees in the form of bonuses, commissions, or leave encashments
  • Interest on loans from state financial corporations, public financial institutions, or authorized banks.

Calculation of income from business and profession

In business and profession, taxable income is profits after deducting expenses. The taxpayer can find profits in the books of accounts preserved throughout the year. Those who earn income from Business or Profession are subject to a Slab Rate that is applicable to them.

The slab rates that are applicable for FY 2019–20 and AY 2020–21 are as follows:

Total income Tax Rate
Up to INR 2,50,000NIL
INR 2,50,000 to 5,00,0005%
INR 5,00,000 to INR 10,00,00020%
Above INR 10,00,00030%

A further 4% Health and Educational Cess will be added to the computed tax amount.

TDS/Advance Tax on Income from Business and Profession

Taxes must be paid by the taxpayer on all business and professional income. There are 2 ways to pay direct income taxes:

  • TDS (Tax Deducted at Source): As a result of the pay while you earn concept, TDS is deducted from any payments made to taxpayers for goods or services. Therefore, business owners need to keep in mind the TDS deducted by customers. Any TDS deducted can be claimed while filing ITR for business and profession. And it will become your refund if there is a loss from B&P. Additionally, if you have made money via B&P, it will lower your tax liability.

  • Advance Tax : A taxpayer must calculate and pay Advance Tax if the tax liability exceeds Rs. 10,000. The purpose of this is to avoid interest under Sections 234B and 234C. The following quarterly payments are essential for advance taxes:

Due date of instalment Advance Tax payable by Individual and Corporate Taxpayers
On or before 15th june 15% of the tax liability 
On or before 15th September 45% of the tax liability 
On or before 15th December 75% of the tax liability 
On or before 15th March 100% of tax liability 

We have reached the conclusion of Income from Business and Profession. Share your views and opinions with us in the comment section below.