Business Income Computation Under explained: this guide covers what Business Income Computation Under means, who it applies to, the step-by-step process, documents required, fees, due dates and penalties in India — so you can stay compliant with confidence and avoid costly mistakes.
Profits and Gains from Business or Profession (PGBP) is the most complex head of income under the Income Tax Act 2025. The computation starts from net profit per books of account, adds back disallowable items, and deducts allowed expenses to arrive at taxable business income. This guide covers the key rules applicable from Tax Year 2026-27.
Method of Accounting
Under ITA 2025, business income is computed on the basis of books of account maintained by the taxpayer. Section 2(19) of ITA 2025 explicitly includes digital records, cloud-based accounting systems, and electronic ledgers as valid "books of account." Both mercantile (accrual) and cash methods are accepted for specified categories.
Cash Payment Limit
A critical disallowance: any expenditure exceeding Rs. 10,000 per day per person paid in cash is disallowed. This applies to all business payments. Payments to transporters are disallowed above Rs. 35,000 per day per person in cash. Digital payments via UPI, NEFT, RTGS, or account payee cheque are fully allowed.
Key Allowable Deductions
- Rent, rates, taxes, insurance for business premises
- Salaries, wages, and bonus to employees
- Interest on business loans (at commercial rates)
- Depreciation on assets per block method
- Bad debts written off (if previously treated as income)
- Scientific research expenditure (100% deduction)
- Advertisement and marketing expenses
- Audit fees and professional charges
- Travelling expenses for business purposes
Key Disallowances
| Item | Treatment Under ITA 2025 |
|---|---|
| Cash payments > Rs. 10,000/day/person | Fully disallowed |
| Personal expenses of owner/partner | Fully disallowed |
| Income tax paid | Disallowed |
| Penalty for law violations | Disallowed |
| TDS not deducted (for applicable payments) | 30% of amount disallowed |
| PF/ESI not deposited by due date | Disallowed in year of payment (deductible in year of deposit) |
| Provision for doubtful debts (non-banking) | Disallowed until written off |
Depreciation Under Block of Assets Method
Assets are grouped into blocks (buildings, plant & machinery, furniture, intangibles). Depreciation is calculated on the Written Down Value (WDV) of the entire block. Common rates:
- Buildings (residential): 5%
- Buildings (non-residential): 10%
- Plant and machinery (general): 15%
- Computers and software: 40%
- Vehicles: 15% or 30%
- Goodwill: No depreciation allowed under ITA 2025 (changed from old Act)
A 50% depreciation restriction applies in the year of purchase if the asset is used for less than 180 days.
Partner Remuneration and Interest — Firm's Deduction
A partnership firm can deduct remuneration to partners only if it is authorised by the partnership deed. The maximum deductible:
- 90% of first Rs. 6 lakh of book profit or Rs. 3 lakh, whichever is higher
- 60% of book profit above Rs. 6 lakh
Interest to partners: maximum 12% per annum deductible by the firm.
Maintenance of Books — Audit Requirements
Business income above Rs. 1 crore (or Rs. 50 lakh for professionals) requires a tax audit under ITA 2025. The auditor reports in Form 3CA/3CB and 3CD. Failure to get audited when required attracts a penalty of 0.5% of turnover or Rs. 1.5 lakh, whichever is less.
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