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Home Income Tax Section 28 of the Income Tax Act 1961: Complete Guide to Business and Professional Income Taxation

Section 28 of the Income Tax Act 1961: Complete Guide to Business and Professional Income Taxation

9/02/2025 05:01:00 PM
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In the intricate world of Indian taxation, Section 28 of the Income Tax Act, 1961 stands as one of the most crucial provisions for millions of taxpayers across the country. Whether you're a small shopkeeper, freelance consultant, manufacturing business owner, or practicing professional, understanding Section 28 is fundamental to properly complying with your tax obligations and maximizing legitimate deductions.

This comprehensive guide breaks down everything you need to know about Section 28, from its basic definition to practical examples, recent amendments, and strategic compliance tips for 2025.

What is Section 28 of the Income Tax Act?

Section 28 is the foundation provision that governs the taxation of "Profits and Gains of Business or Profession" (PGBP). It specifically outlines what types of income qualify as business or professional income and establishes the framework for computing taxable profits from such activities.

At its core, Section 28 ensures that all income streams arising from organized commercial activities or professional services are brought under the tax net. This includes not just the obvious revenues from sales or fees, but also incidental receipts and benefits that flow from business or professional endeavors.

The Fundamental Principle

The underlying principle of Section 28 is comprehensive income inclusion. If you earn money through systematic business activity or professional practice with a profit motive, that income falls under this section's purview—regardless of whether it's your primary income source or a side activity.

Understanding Business vs. Profession Under Section 28

Before diving into the specific income types, it's essential to understand what constitutes "business" and "profession" under Indian tax law:

Business (Section 2(13))

Business encompasses any trade, commerce, manufacture, or adventure in the nature of trade. This broad definition covers:

  • Retail and wholesale trading
  • Manufacturing operations
  • Import/export activities
  • E-commerce ventures
  • Service businesses
  • Even one-time commercial activities with profit motive

Profession (Section 2(36))

Profession refers to vocations requiring intellectual skill, specialized knowledge, or technical expertise. Common examples include:

  • Medical practitioners
  • Legal professionals
  • Chartered Accountants
  • Engineers and architects
  • Consultants and advisors
  • Content creators and artists

The beauty of Section 28 is that it treats both business and professional income under the same tax framework, simplifying compliance for taxpayers with mixed income streams.

Types of Income Covered Under Section 28

Section 28 casts a wide net to capture various forms of income and receipts. Here's a detailed breakdown:

1. Core Business/Professional Income

Revenue from Operations: This includes:

  • Sales revenue from goods or services
  • Professional fees and consultation charges
  • Commission and brokerage income
  • Rental income from commercial properties used in business

Example: A doctor's consultation fees, a trader's profit from selling goods, or a consultant's project fees all fall under this category.

2. Partner Remuneration and Benefits

For partnership firms and LLPs, Section 28 specifically includes:

  • Salaries paid to partners
  • Interest on partner capital contributions
  • Commission and bonuses to partners
  • Any other remuneration or benefits

This ensures that payments to partners for their active involvement in business operations are properly taxed as business income.

3. Compensation and Settlement Receipts

Section 28 covers various types of compensation payments:

  • Contract termination compensation: Amounts received when business contracts are terminated
  • Employment termination benefits: Compensation for ending managerial roles in companies
  • Non-compete agreements: Payments for agreeing not to engage in competing business activities
  • Intellectual property licensing: Income from licensing patents, copyrights, trademarks, or know-how

4. Export Incentives and Government Benefits

The section includes various government incentives:

  • Export promotion schemes benefits
  • Duty drawback receipts
  • Cash assistance under government export schemes
  • Profit from sale of import licenses
  • Benefits under Duty Entitlement Pass Book (DEPB) scheme

5. Insurance Proceeds and Recoveries

Keyman Insurance: When businesses receive payouts from keyman insurance policies, these amounts are taxable under Section 28.

Business Asset Insurance: Insurance claims related to business assets or operations (excluding life insurance not related to business) are included.

6. Asset Conversion Income

When inventory or stock-in-trade is converted into capital assets, the fair market value at the time of conversion becomes taxable income under Section 28. This prevents businesses from converting taxable business income into non-taxable capital appreciation.

Recent Amendments and Updates for 2025

Budget 2025 Key Changes

New Section 44BBD: A significant addition targeting non-residents providing services to electronics manufacturing businesses in India. Such service providers can now compute profits at 25% of receipts, offering a simplified taxation method.

Expanded Digital Compliance: Enhanced reporting requirements for digital transactions and increased scrutiny of cash-based businesses to improve tax compliance.

Amendment to Perquisites Clause: Section 28(vi) has been amended to clarify that benefits and perquisites include both cash and non-cash components, effective from April 1, 2024.

Practical Examples of Section 28 Application

Example 1: Manufacturing Business

Mr. Singh's Furniture Factory

  • Primary Income: Revenue from furniture sales (taxable under Section 28)
  • Rental Income: Rent from leasing factory space to another manufacturer (business-related rental, taxable under Section 28)
  • Insurance Claim: Receipt from fire insurance for damaged inventory (taxable under Section 28)
  • Contract Termination: Compensation from a cancelled supply agreement (taxable under Section 28)

Example 2: Professional Services

Dr. Sharma's Medical Practice

  • Consultation Fees: Regular patient consultation income (taxable under Section 28)
  • Hospital Visiting Fees: Income from visiting hospitals (professional income under Section 28)
  • Medical Equipment Rental: Renting out medical equipment to other doctors (business income under Section 28)
  • Insurance Payout: Keyman insurance received by clinic (taxable under Section 28)
  • Section 194J of the Income Tax Act 

Example 3: Partnership Firm

ABC Consulting Partners

  • Service Revenue: Income from consulting projects (taxable under Section 28)
  • Partner Salaries: Monthly salaries paid to active partners (taxable under Section 28)
  • Partner Interest: Interest on capital contributions by partners (taxable under Section 28)
  • Performance Bonus: Year-end bonuses to partners based on firm performance (taxable under Section 28)

Strategic Tax Planning Under Section 28

Expense Optimization

While Section 28 defines taxable income, remember that you can claim legitimate business expenses to reduce taxable profits:

  • Office rent and utilities
  • Employee salaries and benefits
  • Professional fees and subscriptions
  • Travel and communication expenses
  • Depreciation on business assets
  • Interest on business loans

Timing Considerations

Revenue Recognition: Consider the timing of revenue recognition, especially for service businesses with long-term contracts.

Expense Acceleration: Where legally permissible, accelerate legitimate business expenses to the current year to optimize tax liability.
                                                                             Capital Gain Tax

Record Keeping Excellence

Section 28 compliance heavily depends on maintaining comprehensive records:

  • All invoices and receipts
  • Contracts and agreements
  • Bank statements and financial records
  • Depreciation schedules
  • Insurance policies and claims

Common Compliance Mistakes to Avoid

1. Incomplete Income Reporting

Many taxpayers miss incidental income like insurance claims, compensation receipts, or export incentives. Section 28's broad scope means virtually all business-related receipts are taxable.

2. Personal vs. Business Expense Confusion

Mixing personal expenses with business expenses is a common error. Only expenses "wholly and exclusively" for business purposes are deductible.

3. Partnership Remuneration Errors

Partnerships often incorrectly treat partner payments as profit distributions rather than taxable remuneration under Section 28.

4. Asset Conversion Oversight

Converting business assets to personal use without recognizing the taxable income implications under Section 28.
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Filing Requirements and Compliance

ITR Forms

  • ITR-3: For individuals and HUFs with business/professional income
  • ITR-4: For presumptive taxation scheme users (limited business income)
  • ITR-5: For partnership firms and LLPs

Documentation Requirements

Maintain supporting documents for:

  • All income sources covered under Section 28
  • Legitimate business expense claims
  • Asset purchases and depreciation calculations
  • Partnership agreements and remuneration details

Audit Requirements

  • Businesses: Audit required if turnover exceeds ₹1 crore (₹10 crore for mostly digital transactions)
  • Professionals: Audit required if gross receipts exceed ₹50 lakh
  • Special Cases: Lower thresholds may apply for certain scenarios

Future Outlook and Emerging Trends

Digital Economy Focus

The tax department increasingly focuses on digital economy participants—e-commerce sellers, digital service providers, and online professionals need particular attention to Section 28 compliance.

International Transactions

With the introduction of Section 44BBD and enhanced focus on international service provision, cross-border business income taxation under Section 28 will continue evolving.

Simplified Compliance

Expect continued introduction of presumptive taxation schemes and simplified compliance mechanisms for small businesses and professionals.

Conclusion: Mastering Section 28 for Tax Success

Section 28 of the Income Tax Act serves as the cornerstone for business and professional income taxation in India. Its comprehensive approach ensures that all forms of commercial income are properly taxed while providing clear guidelines for taxpayers.

Success in Section 28 compliance requires:

  • Complete understanding of what constitutes taxable income
  • Meticulous record-keeping of all business transactions
  • Strategic planning to optimize legitimate deductions
  • Professional guidance for complex scenarios
  • Regular updates on amendments and new provisions

Whether you're just starting your business journey or are a seasoned professional, staying informed about Section 28 provisions and maintaining excellent compliance practices will serve you well in minimizing tax liability while avoiding costly penalties.

Remember, tax law is complex and constantly evolving. When in doubt, consult with qualified tax professionals to ensure your Section 28 compliance strategy aligns with current laws and regulations.

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Frequently Asked Questions

1. What is GST and who needs to register for it?

GST stands for Goods and Services Tax; businesses with turnover exceeding thresholds specified by law must register for GST.

2. How can I register for GST online?

Registration can be done via the GST portal by submitting required details and documents electronically.

3. What are the types of GST taxes?

CGST, SGST (for intra-state sales), and IGST (for inter-state sales) are the principal GST types.

4. When and how often should I file GST returns?

Filing frequency varies; monthly, quarterly, or annually based on turnover and nature of registration.

5. What documents are required for GST registration?

PAN card, Aadhaar card, business address proof, bank account details, and photographs are typically required.

6. What is Input Tax Credit (ITC)?

ITC allows taxpayers to deduct the tax paid on purchases from the GST payable on sales.

7. How do I claim Input Tax Credit?

ITC claims are filed via GST returns with valid tax invoices and compliance with specific conditions.

8. What are the penalties for late GST filing?

Penalties include late fees, interest on tax dues, and potential legal consequences for prolonged non-compliance.

9. How can I file my Income Tax Return (ITR)?

ITR can be filed online on the Income Tax Department’s e-filing portal using relevant forms based on income sources.

10. What documents are needed for filing ITR?

PAN, Aadhaar, bank statements, Form 16, investment proofs, and relevant income and expense documents.

11. What is TDS and when is it applicable?

Tax Deducted at Source is applicable on various payments like salary, rent, professional fees as per thresholds.

12. How can tax consultancy help me save money?

By identifying tax deductions, exemptions, and planning strategies tailored to individual or business finances.

13. What is the difference between direct and indirect taxes?

Direct taxes like income tax are paid directly by the individual; indirect taxes like GST are passed to consumers.

14. What are the income tax slabs for individuals?

Income tax slabs vary by age and income under old and new regimes, with different rates applicable.

15. How do I compute taxable income?

Taxable income is total income minus eligible deductions under sections like 80C, 80D, etc.

16. What are common sections for tax deductions?

Sections like 80C (investments), 80D (health insurance), 80G (donations) offer deductions.

17. What is the process for GST audit?

GST audit involves verification of records by a chartered accountant to ensure compliance and proper tax payments.

18. Can tax consultants represent me before tax authorities?

Yes, tax consultants can represent clients during assessments, audits, and inquiries.

19. What is the due date for filing income tax returns?

Typically July 31st for individuals and September 30th for businesses for the previous financial year.

20. How are capital gains taxed?

Capital gains are classified as short-term or long-term, with different tax rates and exemptions.

21. What is e-way bill in GST?

E-way bill is an electronic document for movement of goods worth above a threshold under GST law.

22. How can I verify my ITR online?

Using Aadhaar OTP, net banking, Demat account or sending signed ITR V physically to CPC Bangalore.

23. What forms are used for income tax returns?

ITR-1 to ITR-7 forms, selected based on income sources and taxpayer category.

24. What is advance tax?

Advance tax is the income tax payable in installments during the year itself.

25. What is TDS refund?

Refund of excess TDS deducted beyond actual tax liability after filing ITR.

26. How can I update my PAN details?

PAN details can be updated through NSDL or UTIITSL websites with proper documents.

27. What are the tax benefits for senior citizens?

Higher exemption limits and specific reliefs are available for senior and super senior citizens.

28. Can NRIs file income tax returns in India?

Yes, NRIs with income earned or accrued in India must file ITR.

29. What is the significance of PAN and TAN?

PAN is Permanent Account Number for taxpayers; TAN is Tax Deduction Account Number for deductors.

30. What is the GST composition scheme?

A simplified tax scheme for small taxpayers with turnover under specified limits, with lower compliance.

31. How do I register a partnership firm for GST?

Partnership firms must apply online on GST portal with required documents and info.

32. What are invoices under GST?

GST invoices detail supply of goods or services and are mandatory for claiming ITC.

33. How can I update my business address in GST?

GST portal allows amendment of business address after submitting proof and documents.

34. What is the penalty for late GST payment?

Interest and late fee are levied on tax not paid on or before the due date.

35. What are exempted goods and services under GST?

Certain goods and services like agriculture produce, education, and healthcare may be exempt from GST.

36. How do I know if I'm liable to pay advance tax?

Taxpayers with tax liability exceeding ₹10,000 in a year must pay advance tax.

37. What are tax audit requirements under Income Tax?

Business or professional income taxpayers exceeding threshold turnover must audit accounts and file tax audit reports.

38. What are the consequences of not filing GST returns?

Penalties, blocking of ITC claims, and legal action may follow non-filing of returns.

39. How can tax consultants aid in tax planning?

Consultants analyze finances and suggest legal ways to optimize taxes and maximize deductions.

40. What is the importance of PAN in income tax?

PAN is mandatory for filing returns, TDS transactions, and financial dealings to track taxed income.

41. How is salary income taxed?

Salary income is added to total income and taxed as per slab rates after allowed deductions.

42. What is the limit for cash donations under section 80G?

Cash donations exceeding ₹2,000 are generally not eligible for deduction except to specified funds.

43. Can I file a revised ITR?

Yes, revised returns can be filed before the end of the relevant assessment year to correct errors.

44. What is the impact of GST on exports?

Exports are treated as zero-rated supplies under GST with benefits for refund of input taxes.

45. Can I avail GST registration for multiple states?

Yes, GST registration in multiple states is mandatory if business operates across those states.

46. How do I know my GSTIN?

GSTIN is issued at time of registration and can be viewed/downloaded from GST portal.

47. What documents are required for Income Tax audit?

Financial statements, books of accounts, tax invoices, bank statements, and audit reports are usually required.

48. What is Section 194T and its applicability?

Section 194T mandates TDS deduction on cash withdrawals over a specified limit by individuals or HUFs.

49. Can I claim deductions on home loan interest?

Yes, interest on self-occupied property is deductible under Section 24 up to ₹2 lakh per year.

50. How can I get expert tax consultancy services?

Expert services can be approached through qualified tax consultants who analyze your tax situation comprehensively and help ensure compliance and savings.
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