Business and Professional Income: How It’s Computed

Whether it’s a small trading business or a solo consulting practice, income here isn’t taxed on gross receipts; it’s taxed on what’s left after allowable expenses, computed under its own set of rules distinct from salary or any other head.

Income-Head: Business & Profession

Business and Professional Income

Presumptive Taxation Scheme

Freelancer and Consultant Taxation

Content Creator and Influencer Taxation

Tax Audit

45-Day MSME Payment Rule (43B(h))

Deduction rules and thresholds can be fact-specific. This article is for general information and does not constitute tax advice.

Business vs Profession

The distinction mostly matters for a specific list of thresholds and forms rather than changing the basic computation. A profession covers specified categories requiring specialised skill: legal, medical, engineering, architectural, accountancy, technical consultancy, interior decoration, and under the new Act, explicitly extended to cover information technology and company secretary practice as well, along with anything else the Board notifies. Everything else earned through trade, commerce, or manufacture is business income. Both are charged to tax under new Section 26 (old Section 28), which lists what counts as business or professional income through an inclusive definition covering the obvious cases, trading profit, professional fees, and less obvious ones like export incentives, compensation for management rights, and Keyman insurance proceeds.

How It’s Computed

The starting point is revenue from the business or profession, reduced by expenses incurred wholly and exclusively for it, under old Sections 30 to 37: rent, repairs, depreciation on business assets, employee costs, interest on money borrowed for the business, and a general catch-all provision covering any other expense genuinely laid out for the business that isn’t specifically disallowed elsewhere. Depreciation is computed on a block-of-assets basis using the written-down value method, and unlike most deductions, it can be claimed even in a year where it pushes the business into a loss.

For eligible small taxpayers, a presumptive taxation scheme offers a simplified alternative, computing tax on a prescribed percentage of turnover instead of tracking actual expenses, covered separately in Presumptive Taxation Scheme. Freelancers, consultants and content creators are taxed under this same head, each with specifics worth reading in their own right, in Freelancer and Consultant Taxation and Content Creator and Influencer Taxation.

Common Disallowances

A few provisions specifically claw back deductions that would otherwise reduce taxable profit: payments to related parties considered excessive or unreasonable compared to the fair value of what was received, under old Section 40A(2); cash payments exceeding ₹10,000 in a day to a single person, disallowed in full under old Section 40A(3), regardless of whether the underlying expense was otherwise legitimate; and statutory dues, GST, provident fund, ESI, bonus, and similar liabilities, deductible only in the year they’re actually paid, under old Section 43B, not merely when they accrue on the books. A specific variant of this rule also disallows amounts owed to micro and small enterprises that remain unpaid beyond 45 days, covered in the 45-Day MSME Payment Rule.

Books of Accounts

Specified professionals must maintain books of account if income exceeds ₹1,50,000 in any of the preceding three years, regardless of turnover. For other businesses and professions carried on by an individual or HUF, the requirement kicks in once income exceeds ₹2,50,000 or turnover exceeds ₹25,00,000 in any of the preceding three years. This obligation sits under new Section 62 (old Section 44AA); failing to maintain required books despite crossing the threshold carries its own separate penalty.

FAQs: Business and Professional Income

Does a freelancer need to register as a business to report this income?

No. A freelancer or independent professional reports this income under their own PAN as an individual; there’s no separate business registration required for income tax purposes specifically.

If I have both a salary and freelance income, can I claim business expenses against the freelance portion?

Yes. Salary and business or professional income are computed entirely separately under their own heads. Expenses genuinely incurred for the freelance work can be claimed against that income.

Is there a minimum income before business income needs to be reported at all?

No minimum before it needs to be computed and included in the return, though whether tax actually becomes payable depends on total income across all heads.

What happens if books of accounts aren’t maintained despite crossing the threshold?

A penalty of ₹25,000 can apply for the failure itself, separate from any issue with the underlying income being unverifiable or under-reported.

Can depreciation create or increase a loss?

Yes. Unlike most business losses, unabsorbed depreciation can be carried forward indefinitely rather than being capped at a fixed number of years, and can be set off against most other income in later years too.

Is GST paid on business purchases treated as a business expense?

Generally no, where the corresponding Input Tax Credit has been claimed under GST. Only the net amount excluding the GST component is treated as the expense.

Does moving from salaried employment to freelancing change the ITR form needed?

Often yes. Someone with purely salaried income who starts earning business or professional income typically moves to a form like ITR-3, or ITR-4 if opting for the presumptive scheme.

Can rent paid for a home office be claimed as a business expense?

Partially, and proportionately. A reasonable, documented portion of home-related expenses attributable specifically to the business use of the space can generally be claimed.

Are business losses treated the same as house property losses for set-off purposes?

Not quite; business loss is actually less restricted. It can be set off against most other heads without the ₹2,00,000 same-year cap that applies specifically to house property loss.

Last updated on 29 August 2026