Guide : Income from Business and Profession

Income from business or profession is chargeable to tax only if the business or profession is carried on by a taxpayer at any time during the previous year. Let us first understand what is Business:

Business, in simple words, means an occupation carried on by a person with a view to earn a profit. Business does not include income from the Profession or partnership firm. The business includes any –

• Trade,
• Commerce,
• Manufacturing,
• Even rendering services to others is considered as business.

For example: Owning a shop, running a hotel, transportation, travel agency, share broking, etc.

Profession may be defined as a vocation, or a job requiring some thought, skill, and special knowledge. So profession refers to those activities where the livelihood is earned by the persons through their intellectual or manual skill like:

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

Any income generated from the above-mentioned activities will be taxed under the head “Income from Business and Profession”.

Maintaining Books of Accounts

In case of Business

• Income more than INR 1,20,000 or,
• Total sales, turnover or gross receipts are more than INR 10,00,000 In any of the three immediately preceding previous years

Moreover, this condition has been relaxed for individuals and HUF where they will be bound by the mandate of maintaining books of accounts if:

• Income is more than INR 2.5 Lakhs or,
• Total sales, turnover or gross receipts are greater than INR 25 Lakhs in any of the 3 immediately preceding previous years.

In case of Profession

The taxpayers carrying out any of the above-mentioned professions are required to maintain the books of accounts in accordance with rule 6F of the Income Tax Rules. These professionals have to maintain the books of accounts if the gross receipts exceed INR 1.5 Lakhs in any of the 3 immediately preceding years.

Incomes chargeable under Business and Profession

Any income earned by a taxpayer with an intention to earn a profit is covered under the head business and profession. There are 3 types defined for Businesses/profession under the income tax act:

• Non-Speculative Businesses/Profession: Includes profits/loss from all the normal business carried by a taxpayer. Any salary, remuneration, commission, etc received by a partner from a partnership firm is also considered as a business and professional income of a partner. However, the same is exempt from tax in the hands of the partner.
• Speculative Businesses: As name suggests, it includes profits/loss from doing speculative transactions i.e, without taking actual delivery of goods. Although profits from the speculative business (eg. Share trading) are chargeable under this head, they should be maintained and shown separately while e-filing the income tax return
• Specified Businesses: It includes profits/loss from businesses that are defined under section 35AD of the income tax act. These businesses include affordable housing projects, water fabrication manufacturing units, etc.

However, following are the incomes which are not chargeable as income from business and profession:

• Any profits from activities other than above-mentioned businesses should be shown as casual income and will be shown under Income from Other Sources
• Any income from salary, remuneration, bonus, etc. received by the director of the company is treated as Salary Income and not as a business and professional income.

Expenses allowable from Business and Profession Income

All the expenses incurred wholly and exclusively in relation to the business and profession shall be allowed against the income from such business and profession. Here are some of the expenditures:

• Rent and insurance of the building.
• Payments for Legal and Professional services.
• Remuneration, Bonus, Commission etc. to employees.
• Interest and remuneration to working partners subject to certain conditions.
• Traveling and conveyance expenses.
• Membership fees.
• Payment for know-how, patents, copyrights, trademark, licenses.
• Depreciation on fixed assets.
• Expenditures on scientific research for business purposes.
• Preliminary expenses in case of a company.
• Communication expenses
• Discount allowed to customers.
• Advertisement expenses in respect of promotion of business products.
• Financial Charges (eg. Interest on loans).
• Bank Charges/Bank Commission expenses.
• Entertainment/Business Promotion expenses.
• Staff Welfare expenses.
• Printing and stationery expenses.
• Postage expenses.
• All other expenses relating to business/profession.

All these expenses are allowed on the basis of actual payments as well as on the accrual basis on the date of the finalization of the accounts. For eg: An employee receives an income for the month of March 2020 in the month of April 2020. However, since the income is related to the Financial Year 2019-20 (which ends on 31st March 2020), it can be claimed against the income from the business/professional income of the Financial Year 2019-20.

Expenses allowed only on a payment basis

Here are some of the examples of such expenses:

• Any taxes, duty, cess or fees by whatever name called.
• Expenses towards contribution to Provident fund, Employees’ state insurance premium, Gratuity fund, or other funds for the welfare of the employees.
• Bonus, commission, or leave encashment payable to employees.
• Interest on loan from public financial institutions, state financial corporations, or scheduled banks.

Computation of Taxable Income from Business and Profession

Taxable income from business and profession is profits after deducting expenses related to business activities. Taxpayer can find profits from books of accounts maintained during the year. Income earned from Business and Profession is taxable at a Slab Rate applicable to taxpayer. Following are the slab rates applicable for FY 2019-20/AY 2020-21:

Tax for Freelancers

A freelancer is a person who is self-employed. They have the freedom to select their own projects and assignments. They do not earn a steady income. The nature of their income is more of a professional income. Hence it is covered under the head “Income from Business and Profession” under the Income Tax Act.

The sum of all the receipts received from different projects becomes their income. And all the expenses related to freelancers are allowed to be deducted. Following is the taxable income of a freelancer:

Net Taxable Income = Total Receipts – Freelancing Expenses

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