Section 28 of the Income Tax Act 1961 defines what income is taxable under the head of ‘Profits and Gains of Business or Profession’. Some of the income that it covers includes:
Profits from sales or services
Salary
Commission
Additional funds from the brokerage
Interest on capital
Funds received from partners
The section also covers the computation of the taxable income. By understanding the provisions of this section, you can ensure accurate and timely return filing.
Section 2 of the Income Tax Act defines business and profession, helping you understand the difference between the two.
According to Section 2(13), business refers to companies conducting activities of trade, commerce, manufacture, or the ones including these activities. A key point that defines ‘business’ is that the sole purpose of the transaction must be profits.
Similarly, u/s 2(36), a profession is a vocation that requires specialised skill, talent, and knowledge. So, a professional is an individual whose livelihood depends on the skill/knowledge acquired from birth or vocational education.
Here are some of the income categories taxable under Section 28 of the Income Tax Act:
Profits and gains by the taxpayer from any business or professional activity during the previous year
Income or salary received from business or profession
Compensation received under the following circumstances:
If the individual gets terminated or changes are made in his/her contract, who was responsible for managing wholly or almost full establishment in India
If the individual receives any amount through a contract after termination or changes in the terms and condition
If the individual employed on an agency contract in an Indian company, whose role has been terminated or subject to modification of contract
If the government takes over the controls of the corporation owned or controlled by the government
Income generated from trade, professional or similar activity performed for members of the same service sector
From the following trade activities
On the profit from sales of import or export licence
On the profit from the transfer of the Duty-Free Replenishment Certificate (DFRC)
On the profit made from the transfer of the Duty Entitlement Pass Book (DEPB)
On the drawback from customs duty or excise re-paid or re-payable under the Customs and Central Excise Duties Drawback Rules
On the cash assistance under any scheme of the Government of India
All the salary, interest, bonus, remuneration, commission, or other benefits received from the firm partner are taxable
Benefit/perquisite, monetary or otherwise, resultant of business or exercise of profession are taxable under this section
Sum received or receivable for the following reasons:
Not participating in competitive business /profession
Not sharing the copyright, patent, trademark, franchise, licence or any other type of copyright for assistance in manufacturing or processing of goods and services
The above clause (a) is not applicable in the following circumstances:
A. The amount under ‘Capital gains’ received or receivable sum, in cash or otherwise, for the transfer of rights to manufacture, produce or process that can help carry out business operations
B. The amount received from the multilateral fund under the Montreal Protocol for the activity that results in Ozone layer depletion
The amount received under a Keyman insurance policy
Fair market value received for the inventory gets added into capital assets and is taxable under this section
The amount received on the transfer of capital assets will be taxable as income
Armed with this information, you can easily understand your taxable income from your profits or gains within a fiscal year and calculate the tax liability. Moreover, Section 28 of the Income Tax Act allows you to make deductions in your income for carrying on a business or profession.
Section 28 of the Income Tax Act defines the taxable income generated, directly or indirectly, from the business or profession.
According to the amendment suggested in Finance Bill 2023, clause (vi) of Section 28 was subject to changes. It explains that benefits/prerequisites in monetary or other forms will be chargeable to income tax if they arise from a business or professional source.
The Keyman insurance policy allows employers to insure their employees and become the beneficiary of the claims arising from it.
Businesses can claim all expenses incurred wholly and exclusively for carrying out business operations as a deduction under Section 28. This includes rent, salary, advertisement, maintenance, business loans, etc.
No, income earned from agriculture does not come under Section 28. In fact, all income for agricultural activity is exempt from taxation as per Section 10(1) of the Income Tax Act.