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.

How Does the Income Tax Define ‘Business’ and ‘Profession’?

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.

What are the Different Incomes Considered Under Section 28?

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:

    1. 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

    2. If the individual receives any amount through a contract after termination or changes in the terms and condition

    3. If the individual employed on an agency contract in an Indian company, whose role has been terminated or subject to modification of contract

    4. 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 

    1. On the profit from sales of import or export licence

    2. On the profit from the transfer of the Duty-Free Replenishment Certificate (DFRC)

    3. On the profit made from the transfer of the Duty Entitlement Pass Book (DEPB)

    4. On the drawback from customs duty or excise re-paid or re-payable under the Customs and Central Excise Duties Drawback Rules

    5. 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:

    1. Not participating in competitive business /profession

    2. 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. 

FAQs on Section 28 of the Income Tax Act

What is Section 28 of the Income Tax Act?

Section 28 of the Income Tax Act defines the taxable income generated, directly or indirectly, from the business or profession. 

What is the Section 28 Amendment?

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. 

What does the Keyman insurance policy state?

The Keyman insurance policy allows employers to insure their employees and become the beneficiary of the claims arising from it.

What expenses can you claim as a deduction under Section 28?

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. 

Does income from agricultural activity come under Section 28?

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. 

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