Basis of Taxation of Profits and Gains from Business or Profession (PGBP): Your No-Nonsense Guide

In India’s complex tax world, the treatment of profits and gains from business or profession—often dubbed “PGBP”—stands out as one of the most intricate (and, for many, confusing) segments. If you’re a shopkeeper, freelancer, trader, manufacturer, doctor, designer, or run any kind of commercial venture, understanding PGBP is the secret to paying only what you owe, claiming all the deductions you deserve, and steering clear of the dreaded taxman’s scrutiny.

This definitive guide demystifies the “PGBP” head of income with zero jargon, real examples, actionable tips, practical tools, and relevant 2025 updates. Whether you’re a professional, small business owner, partner in a firm, or a CA advising clients, you’ll find this piece a true go-to resource for Indian business taxation.

What is "Profits and Gains from Business or Profession" (PGBP)?

Let’s start simple. “Profits and Gains from Business or Profession” is one of the five main income heads under Indian tax law. As you might guess, this head covers all earnings from any trade, manufacture, commerce, or professional activity—basically, any organized attempt to make money that isn’t your salary or a passive investment.

It includes:

Shops, factories, boutiques, agencies, startups
Individual freelancers, consultants, doctors, lawyers, engineers
Small “side hustles” making regular profit (even if run from home!)
E-commerce businesses or online sellers
Traderships, contractors, partnerships, and LLPs

The keyword is systematic activity with a profit motive.

Not sure if your activity qualifies as business or profession? Check out this detailed explainer:
👉 Who is Covered under Profits and Gains of Business or Profession?

Business vs. Profession at a Glance

Business: Buying, selling, manufacturing, or trading goods for profit (from local grocery store to multinational).

Profession: Work requiring intellectual skill or specialized knowledge (doctor, CA, architect, consultant, artist).

The two are taxed under the same income head; calculation rules are nearly identical.
Want to dive deeper into the professional angle? Explore:
👉 Understanding Profession under Income Tax

What Income is Taxable under PGBP?

PGBP isn’t just about straightforward profits—there’s a whole universe of what counts as income:

Core Activities

Income from buying/selling goods, manufacturing, providing professional services, and consulting.

Incidental & Miscellaneous Earnings

Rent from business property
Commissions, bonuses, incentives
Compensation for contracts
Export incentives, duty drawbacks
Income from trade/industry associations
Perquisites or Keyman insurance proceeds

Special Cases

Estimated profits during investigations
Gains from converting inventory into capital assets
Even income from illegal businesses is taxable!

What Expenses Can You Deduct? (Your Tax Planning Toolkit)

Only profits after eligible business expenses are taxed. So, claim every rupee spent strictly for your business.

Deductible Expenses Include:

Rent, rates, taxes, repairs of business premises
Depreciation calculators for machinery, computers, furniture, vehicles
Staff salaries, wages, and partner remuneration
Professional fees and subscriptions
Consumables, packaging, input goods
Power, water, internet, phone
Travel, conveyance
Insurance, interest, bank charges
Maintenance, admin costs
Marketing, advertisements
Statutory payments, bad debts written off, gratuity, bonuses

Keep all bills, contracts, and transaction logs safe—you’ll be glad at tax time! For gratuity calculations and more, check:
👉 Gratuity Calculator Online

Expenses You Can’t Deduct

Personal expenses
Full value of capital purchases (claim depreciation, not total)
Fines/penalties
Charity/donations, unless under Section 80G
Random reserves/funds without approval

Calculating PGBP Income: The Step-by-Step Formula (2025)

Compute gross receipts/turnover for the year
Subtract eligible business expenses
Add back inadmissible expenses per Sec. 40, 40A
Adjust for unreported incomes, recoveries
Net Taxable Business/Professional Income

Example: Shopkeeper

Turnover: ₹40,00,000
Purchases: ₹30,00,000
Staff Salaries: ₹2,00,000
Rent: ₹1,20,000
Depreciation: ₹80,000
Telephone/Misc: ₹50,000

Gross Profit: ₹6,00,000
Less total other expenses: ₹4,50,000
Net taxable income (PGBP): ₹1,50,000

Need calculation help? Try:
👉 Income Tax Calculators

Which Accounting Method Should You Use?

Choose mercantile (standard) or cash system—stick to it unless special reasons. Freelancers often prefer cash-based; businesses opt for mercantile.

Speculation and Composite Businesses

Speculative profits/losses (stock trading, etc.) are taxed under PGBP but treated separately from regular business.
Learn more about composite businesses:
👉 Section 194T: Tax Burden on Partnership Firms/LLP

Advances, Recoveries, & ‘Other Income’

Recovering a written-off expense? Report and pay tax when recovered. Same for insurance claims, provisions written back, etc.

Audit & Books of Account: When is it Mandatory?

If turnover is above ₹1 crore (or ₹10 crore if 95%+ receipts/payments digital), audit by a Chartered Accountant is a must.
Professionals: ₹50 lakh+ receipts triggers audit.
Books: Cashbook, ledger, invoices, bills, payroll records.

Presumptive Taxation Schemes

Section 44AD: Businesses (except professionals) up to ₹2 crore turnover; declare 6–8% as taxable income—skip books & audit.
Section 44ADA: Professionals up to ₹75 lakh; pay tax on 50% of receipts.

Set-Off and Carry Forward of Business Losses

If you have a loss:
Set off against other income heads (except salary) same year
Carry forward for up to 8 years for future set-off
See full rules:
👉 Carry Forward/Set-Off Explained

TDS & Advance Tax for PGBP

If clients deduct TDS, check credits against your Form 26AS.
If tax due > ₹10,000 annually, pay advance tax; presumptive users pay by March 15.

ITR Filing: Forms, Deadlines & Compliance

ITR-3: Business or profession, individual/firm/HUF
ITR-4: Presumptive taxes
ITR-5: Firms/LLPs
Audit cases: Due Oct 31
Non-audit: July 31

Find timely filing tips:
👉 Latest Income Tax News

Reporting, Disclosures, and Compliance Trends for 2025

AIS/TIS match your returns—reconcile data before filing. More details now needed on digital receipts, international income, asset sales. Going digital reduces queries/disputes.

For GST, FEMA, and calculators related to your business, see:
👉 GST Resources
👉 FEMA Insights

Partnerships, LLPs, & Companies

Partner remuneration & interest per Section 40(b) must follow deed & IT limits.
LLPs may face AMT; check FIRMs/LLPs filing on ITR-5 info.

PGBP FAQs for 2025

Q: I’m a full-time employee but also do consulting. Where does side income go?
A: All consulting, gigs, freelancing = PGBP. Use ITR-3 filing guide.

Q: Boutique from home—business or profession?
A: Regular operation with profit motive = business.
Explore calculation examples.

Conclusion: Take Control of Your PGBP Taxation

If you dream, hustle, trade, consult—or moonlight as a creator—mastering PGBP is crucial. With proper records, timely claims, and smart use of beneficial regimes, you can minimize tax, avoid notices, and fuel sustainable growth.

Want to ask, compare, or use free tax tools?
👉 Latest calculators on ftaxco.in
Filing smarter-step ahead in India's business tax game!

Basis of Taxation of Profits and Gains from Business or Profession (PGBP): Your No-Nonsense Guide

What is "Profits and Gains from Business or Profession" (PGBP)?

Business vs. Profession at a Glance